Massachusetts State Life Insurance Practice Exam

What is the effect of a collateral assignment in a life insurance policy?

1. Complete transfer of policy rights to a new owner

2. Temporary transfer of rights for securing a loan

3. Permanent cancellation of the policy

4. Increases the death benefit payable

The correct answer is: Temporary transfer of rights for securing a loan

A collateral assignment in a life insurance policy is primarily used as a way to secure a loan. In this arrangement, the policyholder temporarily assigns some or all of the rights of the policy to a lender as collateral for the loan. This means that while the lender has a claim to the policy, the original policyholder retains ownership and can continue to receive the benefits of the policy, such as possible cash value accumulation and the right to change beneficiaries. When the loan is repaid in full, the collateral assignment is usually rescinded, and the rights revert entirely to the policyholder. This temporary nature of the assignment distinguishes it from a complete transfer of policy rights or a permanent cancellation. The collateral assignment does not inherently increase the death benefit; instead, it serves as a means of securing the lender's interests should the policyholder default on the loan.