What is the main difference between absolute and collateral assignment in life insurance?

The main distinction between absolute and collateral assignments in life insurance lies in the nature of ownership and the duration of the assignment. Absolute assignments grant complete ownership of the policy to another party, meaning that the new owner has full control over the policy, including the right to make changes or withdraw cash values. This transfer of ownership is permanent, indicating that the original policyholder relinquishes all rights to the policy.

On the other hand, collateral assignments are typically used as a form of security for loans. In a collateral assignment, the policyholder retains ownership of the life insurance policy, while temporarily assigning rights to the benefits or cash value to another party, such as a lender. This type of assignment is temporary because it remains in effect until the obligation, like a loan, is satisfied.

Understanding this key difference clarifies why absolute assignments are seen as permanent and involve a total transfer of ownership, while collateral assignments maintain the original owner's rights and are only in place for a specified purpose until the obligation is fulfilled.