Life and Health Insurance · Life Insurance · 6 min read
Absolute and Collateral Assignments
- Differentiate between an absolute assignment and a collateral assignment in life insurance.
- Explain how an active collateral assignment affects death benefit payouts to lenders and revocable beneficiaries.
- Identify insurer notification requirements, beneficiary consent rules, and the legal limits of an insurer's responsibility regarding assignments.
Understanding Policy Assignments
An assignment is the transfer of some or all policy ownership rights from the policyowner to another party. In this transaction, the original policyowner who transfers rights is called the assignor. The person or institution receiving those transferred rights is called the assignee. Many life insurance policies include an assignment provision explaining how the insurer records a transfer of policy rights.
Only the policyowner has the legal authority to assign rights in a life insurance policy. The insured does not have the right to assign the policy unless the insured is also the policyowner. For example, an employer who owns a policy covering a key employee holds the sole authority to assign policy rights, while the employee whose life is covered holds no such power.
The two primary types of life insurance assignments are absolute assignment and collateral assignment. Each type serves a different purpose, transfers a different scope of rights, and creates different legal relationships between the assignor, the assignee, and the insurer.
Common mistakes
- Assuming an insured who is not the policyowner can assign the policy; only the policyowner holds the authority to transfer policy rights.
- Believing that an absolute assignment replaces the insured person with a new insured; an absolute assignment changes ownership, but the insured person remains the same.
- Thinking that a lender under a collateral assignment receives the entire death benefit regardless of the loan balance; the collateral assignee is limited to the unpaid debt and covered amounts.
- Assuming an insurer validates the legality of an assignment; recording an assignment does not mean the insurer guarantees its legal validity.
Key points
- An assignment transfers policy ownership rights from the assignor (policyowner) to an assignee, and only the policyowner has the legal authority to execute an assignment.
- An absolute assignment is a permanent transfer of all rights, title, and interest, making the assignee the new policyowner, often used for gifts or charitable donations.
- An absolute assignment does not change the insured person, the coverage amount, or the policy terms.
- A collateral assignment is a temporary transfer of limited rights used to secure a debt, leaving the assignor as the policyowner while giving the lender a secured claim on cash value or death proceeds.
- Under a collateral assignment, the lender's claim is superior to a revocable beneficiary's claim, but the lender cannot keep death proceeds beyond the debt secured by the assignment.
- An irrevocable beneficiary has a vested interest, meaning their consent is generally required for an absolute or collateral assignment that would impair their rights.
- Assignments generally require written notice to the insurer to be effective against the company, and recording an assignment does not mean the insurer guarantees its legal validity.
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