In collateral assignment, which statement is true?

In collateral assignment, which statement is true?

• A. Ownership is transferred to lender
• B. Ownership is not transferred
• C. It cancels the policy
• D. It transfers the premium obligation

Answer: (B)

Collateral assignment keeps ownership with the policyowner. The lender gains a security interest in the policy’s benefits to help secure the loan, but the borrower still owns and controls the policy, including paying premiums and naming beneficiaries. Because the owner remains unchanged, the policy stays in force as long as premiums are paid. The arrangement is typically revocable and can be released once the loan is repaid. If the insured dies, the death benefit is used to satisfy the loan first, with any remaining proceeds going to the policy’s beneficiary. That’s why the true statement is that ownership is not transferred to the lender. Transferring ownership would give the lender control of the policy, which collateral assignment does not do. Cancelling the policy or transferring premium obligations would defeat the purpose of securing the loan and are not characteristics of collateral assignment.

Collateral assignment keeps ownership with the policyowner. The lender gains a security interest in the policy’s benefits to help secure the loan, but the borrower still owns and controls the policy, including paying premiums and naming beneficiaries. Because the owner remains unchanged, the policy stays in force as long as premiums are paid. The arrangement is typically revocable and can be released once the loan is repaid. If the insured dies, the death benefit is used to satisfy the loan first, with any remaining proceeds going to the policy’s beneficiary.

That’s why the true statement is that ownership is not transferred to the lender. Transferring ownership would give the lender control of the policy, which collateral assignment does not do. Cancelling the policy or transferring premium obligations would defeat the purpose of securing the loan and are not characteristics of collateral assignment.