What action can a policyowner take when a bank loan requires collateral?

When a policyowner needs to provide collateral for a bank loan, assigning policy ownership to the bank is a valid course of action. This method allows the bank to have a claim to the policy's benefits in the event that the borrower defaults on the loan. By assigning ownership, the bank becomes the primary beneficiary of the policy, which gives them security for the loan, as the value of the life insurance can serve as collateral.

This action protects both the lender and the borrower. The lender has assurance that in the event of the policyowner's death, the loan will be repaid from the insurance proceeds. For the policyowner, this allows them to retain access to the policy's coverage while satisfying the bank's requirement for collateral.

Other options do not effectively fulfill the purpose of providing collateral for the loan. Terminating the policy would mean losing the insurance protection and benefits entirely, leaving the policyowner vulnerable. Applying for a second policy could be an alternative but does not directly address the collateral requirement for the existing loan. Liquidating the policy's cash value might provide immediate funds but would also result in losing the long-term benefits of having the insurance coverage, which may not be in the policyowner's best interest.