What is a collateral assignment in life insurance policies?

A collateral assignment in life insurance policies refers to a temporary arrangement where the policy's death benefit proceeds are pledged to secure a debt or obligation. This is commonly used when an individual takes out a loan and wants to provide additional assurance to the lender that the loan will be repaid, by making part of the life insurance benefit available in case of their untimely death.

In contrast to a permanent transfer of ownership, which would give the assignee full rights to the policy, a collateral assignment allows the policyholder to retain ownership while providing a claim against the policy for the lender, should the need arise. If the debt is fully repaid, the assignment can be released, restoring the policyholder’s full rights to the policy benefits. This mechanism allows policyholders to use their life insurance as collateral without relinquishing complete control over the policy itself.