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Life insurance pledging: a financial guarantee instrument and its implications

By Yasmine EDDAM13 June 2025

Much more than a simple savings product, a life insurance policy is a versatile financial asset. Its economic value makes it a particularly valuable collateral for creditors, especially a bank or other credit institution, which may require it to be pledged as security for a loan, such as a mortgage. This operation, known as life insurance pledging, is a conventional security interest governed by precise rules that distinguish it from other guarantees such as mortgages or pledges of business assets. Understanding in detail how pledging works is essential for both borrowers and lenders. Pledging a life insurance policy is part of the broader framework of collateral security, which is based on the fundamental principles of pledging under french law.

What is pledging a life insurance policy?

Pledging a life insurance policy is an agreement whereby the policyholder, often a borrower, agrees to pledge the value of the policy as security for a debt owed to a creditor. In practice, this involves 'pledging' the claim that the policyholder has on the insurance company, a claim materialised by the surrender value of the policy. Although intangible, this claim represents an asset that can be used to secure a loan without liquidating it. This security interest is governed primarily by article L. 132-10 of the Insurance Code, which refers to the ordinary law governing pledges of receivables for certain procedures.

The advantages of this security for the borrower and the lender

The main advantage of this operation is twofold. For the subscriber-borrower, it enables them to obtain a loan, sometimes at a more favourable rate, without losing their savings. The pledged policy continues to exist, and the capital invested continues to grow in the chosen vehicles (euro funds, units of account), retaining its tax priority, even if its availability is limited by the guarantee. For the lender, whether a bank or another organisation, pledging life insurance offers a liquid guarantee that is simpler to put in place than a mortgage in the event of default by the borrower. It is an effective solution for covering loan repayments.

Life insurance pledge or mortgage for a mortgage?

When you take out a mortgage, the question of the guarantee is central. It should be noted that this guarantee is in addition to, and does not replace, the essential loan insurance (or borrower's insurance). While conventional mortgages are still a common solution, pledging a life insurance policy is an interesting alternative. Unlike a mortgage, which encumbers a property and requires a notarised deed to be drawn up, which is very costly, a pledge contract is often a private deed, which is less costly to set up. What's more, once the loan has been repaid, releasing the pledge is a simple administrative formality, whereas releasing a mortgage guarantee incurs new costs. The main drawback, however, is that for this solution to be accepted by the bank, the surrender value of the insurance policy must be sufficient to cover the capital borrowed, which presupposes that you have substantial savings. This solution is particularly appropriate for securing a bullet loan, where only the capital is repaid at maturity. The choice will therefore depend on the borrower's financial situation (age, income, extent of assets) and the terms of the loan offer, particularly if the amount to be insured is high.

Pledging: a formalised procedure

The creation of a pledge on a life insurance policy is a legal act that requires compliance with substantive and formal conditions. These formalities are designed to protect the interests of all parties involved: the policyholder, the insurer, the creditor seeking to secure its loan, and the potential beneficiary of the policy.

Necessary consents: the agreement of the parties

The validity of the pledge is subject to a tripartite agreement. Firstly, the policyholder's consent is essential. It is he, the policyholder, who agrees to assign this asset as security for his debt. Secondly, the insurer's consent is also required. In practice, the insurance company or the group to which it belongs intervenes directly in the pledge deed, making the transaction immediately enforceable against it. It plays an active role, since it is the debtor of the pledged claim and must, where applicable, pay the surrender value to the creditor.

The situation becomes more complicated if there is an accepting beneficiary. If a person has been designated as beneficiary in the event of the death of the insured (standard death insurance clause in the policy) and has formally accepted the designation *before* the pledge is put in place, that person's consent is imperative. Without this agreement, pledging is impossible because acceptance has rendered her rights to the capital irrevocable. Conversely, if the beneficiary's acceptance is given *after* the pledge has been made, that acceptance cannot be enforced against the pledgee. The law is clear on this point, as set out in article L. 132-10 of the Insurance Code. In practical terms, the creditor will be free to exercise his right to cause the policy to be surrendered, even against the wishes of the late beneficiary. The timing and date of acceptance are therefore decisive.

Formalities of the pledge deed

To pledge a life insurance policy, the act must be recorded in writing, failing which it will be null and void. It takes the form of an addendum to the initial insurance contract, signed and dated by the policyholder, the pledgee and the insurer, whose identity and capacity must be clearly stated. This deed must specify the debt secured (for example, the mortgage and its amount) and the debt pledged (the surrender value of the insurance policy). By way of example, for named policies, which make up almost all contracts, this endorsement is the only way to proceed. Because it relates to the surrender value, which is a claim by the policyholder on the insurer, this act is similar in some respects to the general system for pledging receivables. Notification of the deed of pledge to the insurance company, or its direct involvement in the deed, is a fundamental step. It is this formality that makes the pledge enforceable against the insurer. As a result, the insurer will no longer be able to validly discharge the amount owed to the policyholder.

The effects and rights of the secured creditor

Once the pledge has been validly constituted, it gives the creditor a set of prerogatives over the life insurance policy, while setting certain limits. If the borrower defaults on payment, the creditor will be able to activate the collateral to obtain repayment of its claim, enjoying a very favourable position compared with the debtor's other creditors.

The right to redeem the contract: the creditor's essential prerogative

The pledgee's most powerful right is to cause the policy to be surrendered, whether in whole or in part. The law is now unambiguous: if the debtor defaults, the secured creditor can demand that the insurer pay the surrender value of the policy, up to the amount of its claim. This option, provided for in article L. 132-10 of the Insurance Code, is an exception to the historical prohibition on commissory agreements in certain contexts. The law here validates a form of direct attribution of the pledged claim to the creditor, which makes this guarantee particularly effective and quick to implement.

An exclusive right to payment: priority over other creditors

The strength of a life insurance pledge is fully apparent in the hierarchy of creditors. Case law, in particular a Court of Cassation ruling of 2 July 2020 (Civ. 2e, no. 19-11.417), has clearly established that the creditor who is the beneficiary of such a pledge has an exclusive right to payment of the surrender value. This right takes precedence over any competition with the policyholder's other creditors, including so-called preferential creditors such as the Treasury. Thus, even if the tax authorities issue a third-party notice against the life insurance policy, they will not be able to override the secured creditor whose guarantee has been duly established. This absolute priority gives considerable security to the lender who has accepted this form of security.

Management of the contract: a limit on the creditor's powers

However, the pledgee's power is not unlimited. His guarantee relates to the value of the contract through the right to surrender, and not to its financial management. Case law has established a clear principle: the creditor cannot interfere in the policyholder's asset management choices, particularly in the case of unit-linked policies where the capital invested is subject to market fluctuations. The lender does not have the right to arbitrate between the various investment vehicles (euro funds, equities, bonds, etc.) that make up the contract and influence its rate of return. This right, which may be exercised freely, remains a personal prerogative of the policyholder, unless expressly provided for in a clause in the deed of pledge. The creditor is the custodian of the guarantee; he is not the investment manager.

Special situations and the end of the pledge

The life of a pledge is linked to that of the loan it secures. Its effectiveness may be affected by certain procedures, and its termination must be formally recorded when the debt is extinguished.

Collateral in bankruptcy proceedings

The opening of safeguard, reorganisation or liquidation proceedings against the debtor-subscriber has a direct effect on the pledge. If the guarantee was set up before the opening of proceedings, it remains valid. The pledged creditor must declare his claim to the proceedings, specifying the nature of his security. This situation must be distinguished from judicial pledging, which is a protective measure ordered by a judge and subject to a different regime. However, its effectiveness is partly paralysed. The opening judgment freezes the liabilities and prohibits the payment of previous claims. More importantly, the rules governing insolvency proceedings prevent the execution of a commissoire agreement. This means that even if the debt is payable, the pledged creditor can no longer redeem the contract in order to receive its value. He retains his preferential right over the sum resulting from the liquidation of the contract, but loses the option of direct realisation which is a major part of the strength of his guarantee.

Release of pledges: how do you release the guarantee?

When the loan matures, or once it has been repaid in full over the entire term of the loan, the pledge no longer serves any purpose. The borrower, sometimes at the end of a long repayment process, must then request the release of the guarantee to lift the constraint and regain full disposal of his or her life insurance policy. This is done by applying to the lending institution. Once the debt has been extinguished, the bank must draw up a release deed, which must then be sent to the insurance company. The insurer will then be able to record the end of the pledge, and the policyholder will once again be free to make surrenders, arbitrages or changes to the beneficiary clause. A release can also be partial, for example if a significant part of the capital has been repaid and the creditor agrees to reduce the amount of his guarantee, especially if the cover ratio remains sufficient. It is also possible to provide for a partial pledge from the outset, covering only a fraction of the value of the contract.

Pledging a life insurance policy is an effective form of security, but its implementation and effects are subject to strict conditions. Precise wording of the pledge endorsement is essential to secure the creditor's rights to the security given without unduly prejudicing those of the policyholder or beneficiary. To analyse the relevance of this operation to your situation or to help you set it up, our legal assistance in structuring and securing your financial guarantees is at your disposal.