What type of assignment is used to secure the payment of a debt with an existing life insurance policy?

Collateral assignment is the term used to refer to the process in which a life insurance policy is used as security for a debt. In this scenario, the policyholder temporarily transfers certain rights of the policy to a creditor. This transfer allows the creditor to claim the policy’s death benefit up to the amount owed if the policyholder dies before the debt is repaid. The rights of the policy remain with the policyholder, ensuring that they can continue to maintain coverage and access the policy’s benefits as long as the debt is settled.

This method is commonly used in loans, such as when individuals take out a mortgage or personal loan and use their life insurance as a form of collateral. It gives the lender assurance that they will recover funds should the insured individual pass away before the debt is cleared, without requiring a complete transfer of ownership of the policy.

In contrast, absolute assignment involves a full transfer of ownership of the policy to another party, which is not solely focused on securing a debt. Permanent and temporary assignments are not standard terms used to describe the aspect of using an insurance policy as collateral. Therefore, collateral assignment is the appropriate term for this type of arrangement.