What is collateral assignment in life insurance?

What is collateral assignment in life insurance?

• A. A temporary transfer of policy ownership rights to secure a loan or debt, revocable when the loan is repaid
• B. A permanent transfer of ownership
• C. A change of beneficiary
• D. A policy loan provision

Answer: (A)

Collateral assignment uses a life insurance policy as security for a loan. It is a temporary transfer of policy ownership rights to the creditor to guarantee repayment, while the policy owner still retains overall control. Because the loan is the security, the assignment can be revoked once the debt is paid off, restoring full ownership to the insured. If the insured dies while the loan is outstanding, the lender can claim proceeds up to the loan amount to satisfy the debt, and any remaining death benefit goes to the beneficiary. This differs from permanently transferring ownership, changing the beneficiary, or simply taking a loan against the policy’s cash value.

Collateral assignment uses a life insurance policy as security for a loan. It is a temporary transfer of policy ownership rights to the creditor to guarantee repayment, while the policy owner still retains overall control. Because the loan is the security, the assignment can be revoked once the debt is paid off, restoring full ownership to the insured. If the insured dies while the loan is outstanding, the lender can claim proceeds up to the loan amount to satisfy the debt, and any remaining death benefit goes to the beneficiary. This differs from permanently transferring ownership, changing the beneficiary, or simply taking a loan against the policy’s cash value.