What is a collateral assignment?

A collateral assignment refers to a temporary transfer of rights associated with an insurance policy, typically used to secure a loan. In this arrangement, the policyholder may assign a portion of the death benefit or cash value of the policy to a lender as collateral, while still retaining ownership of the policy and the rights to its benefits. This type of assignment allows the policyholder to access funds or loans while providing the lender with some assurance that the loan will be repaid.

In this context, the collateral assignment is distinct from a full ownership transfer, which would result in the complete relinquishment of rights to the policy. Additionally, it does not permanently change the coverage type of the policy, nor does it involve assigning the benefits to a third party for permanent benefit transfer. The temporary nature of collateral assignments is crucial, as they revert the rights back to the policyholder once the loan obligation is settled.