What is the typical factor for determining if collateral for a loan is sufficient when using a life insurance policy?

In the context of determining the sufficiency of collateral for a loan using a life insurance policy, the net death benefit is a critical factor. The net death benefit is the amount that the insurer would pay to the beneficiary upon the death of the insured, minus any outstanding loans against the policy. This figure provides a clear indicator of the policy's value and serves as a measure of the collateral's reliability.

Lenders often look to the net death benefit because it reflects the ultimate payout potential of the policy. This ensures that if the borrower defaults on the loan, the lender has recourse to a significant value that is tied to the life insurance policy. While other factors, such as cash surrender value, past performance, and premium payment history might provide additional context about the policy's overall health and stability, the net death benefit is most directly relevant when establishing collateral worthiness for loan purposes.