What is collateral assignment of an insurance policy?

Collateral assignment of an insurance policy involves designating a portion of the policy's proceeds as security for a loan or obligation, typically to settle existing debt. In this arrangement, the policyholder retains ownership of the insurance policy but grants the assignee, often a lender or creditor, rights to claim the proceeds up to the amount of the debt should the policyholder pass away. This serves to protect the lender by ensuring they receive payment if the policyholder is unable to settle the debt due to their death.

In contrast, transferring full ownership of the policy completely shifts all rights and responsibilities to another party, which does not align with the concept of collateral assignment. Similarly, conveying ownership to a family member or assigning the policy to a charity removes the original policyholder's control and does not specifically serve as collateral for loans. These options do not represent the typical function or purpose of a collateral assignment, which is explicitly tied to securing financing arrangements.