Indiana State Life and Health Insurance Practice Exam

What is the term for using a Life Insurance policy as collateral for a bank loan?

1. Revocable Assignment

2. Beneficiary Change

3. Irrevocable Assignment

4. Collateral Assignment

The correct answer is: Collateral Assignment

When a life insurance policy is used as collateral for a bank loan, the terminology that best fits this arrangement is "Collateral Assignment." This occurs when the policyholder assigns part or all of the benefits of their life insurance policy to a lender as security for a loan. In the event that the policyholder passes away while the loan is still outstanding, the lender receives the death benefit up to the amount owed on the loan, ensuring that their risk is mitigated. This concept is particularly significant because it allows the insured to borrow against the value of their life insurance without permanently giving up rights to the policy. The remains of the policy can still be passed on to the designated beneficiaries after the loan is repaid. This practice enables individuals to leverage their life insurance assets while maintaining the insurance coverage’s purpose of providing financial security to their loved ones. Other related terms like Revocable Assignment or Irrevocable Assignment describe different methods of transferring rights or benefits of the policy, but they do not specifically encompass the use of the policy as collateral for a loan. A beneficiary change refers to altering the person designated to receive a benefit under the policy and does not involve the same collateralization strategy. Thus, "Collateral Assignment" is the precise term for this financial maneuver.