Collateral assignment is used to temporarily pledge a life insurance policy as security for a loan. Which option describes this correctly?

• A. It permanently transfers ownership to the lender
• B. It is used to temporarily pledge a life insurance policy as security for a loan
• C. It changes the policy's death benefit to equal the loan
• D. It terminates the policy upon default

Answer: (B)

Collateral assignment means you pledge a life policy as security for a loan while you still own and control the policy. The lender gets a claim to the policy’s proceeds up to the loan amount, but ownership and control remain with you (the policyowner). The assignment is temporary and can be released once the loan is repaid. If the insured dies before repayment, the death benefit is used to cover the outstanding loan first, up to what is owed, with any remaining proceeds going to the policyowner or designated beneficiary. This setup is not a permanent transfer of ownership, it doesn’t change the death benefit to equal the loan, and it doesn’t terminate the policy upon default.