Life Insurance Policy Assignment
What is a life insurance policy assignment?
In its simplest form, a life insurance policy assignment is the transfer of ownership or a portion of a death benefit to another person or entity.
Who can make a policy assignment?
Not just anyone. It is the owner of the policy who has the right to make a life insurance policy assignment. However, they can’t just decide to transfer the ownership of the policy to someone else on a whim. There are steps the owner of the policy must go through to enact a life insurance policy assignment. A life insurance policy is a valid contract, after all.
To enact a life insurance policy assignment, the policy owner must notify the insurer of their intentions and request an assignment form so they can provide the insurer (insurance company who issued the policy) all the proper information related to their request. Once completed, the insurer will record the assignment formally, and then it is complete.
Why would a policy owner make a life insurance policy assignment?
Well, there are two situations in which a policy owner would want to assign their policy. A life insurance policy owner can use an assignment to either assign ownership of the policy or a portion of the policy proceeds to someone else.
What types of assignments are available to the owner of a life insurance policy?
There are generally two types of policy assignments available to the policy owner as follows:
1 – Absolute assignment – An absolute assignment is the permanent transfer of ownership of a life insurance policy. It is permanent and, once made, cannot be revoked. For example, a parent purchases a life insurance policy on a child. Once the child reaches 18, the parent can transfer ownership of the policy to their child. Once they do so, the child now has all ownership rights and is also responsible for paying the premium for the policy.
Learn more about an absolute assignment.
2 – Collateral assignment – A collateral life insurance policy assignment is temporary. If a policy owner needs to obtain a loan, they can use their life insurance as collateral for the loan. If the owner of the policy obtains a $20,000 loan, they can list the lender on a collateral assignment with their insurer, and if the owner dies while the loan is outstanding, whatever is owed on the loan is paid to the lender, and any death benefit remaining is paid to the beneficiary of the policy.
What happens if a loan is paid off under a collateral policy assignment?
Once a loan is paid off, the owner of the policy can terminate a collateral assignment. Remember, collateral assignments are temporary. You can think of it this way; the life insurance policy proceeds are being used as collateral for the loan. Once the loan is satisfied, the lender no longer needs any further collateral.
What else can help me prepare to pass my insurance licensing exam on my first attempt?
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