Washington Life Producer Practice Exam

What is the term for a provision allowing a policyowner to temporarily give up rights to secure a loan?

1. Subrogation assignment

2. Collateral assignment

3. Permanent assignment

4. Transfer of ownership

The correct answer is: Collateral assignment

The correct term for a provision that allows a policyowner to temporarily give up rights to secure a loan is collateral assignment. This arrangement provides a way for the policyowner to use their life insurance policy as collateral for a loan. Essentially, through a collateral assignment, the policyowner assigns a specific benefit, such as the death benefit or cash value, to the lender to secure the loan. This means that if the policyowner defaults on the loan, the lender can claim the assigned benefits up to the amount owed. Collateral assignments are particularly advantageous because they do not affect the policy ownership in its entirety; the policyowner retains control of the policy and can reclaim the rights once the loan is repaid. This contrasts with other assignment types, such as permanent assignment, where ownership is fully transferred, potentially removing the policyowner's rights altogether. Understanding the nature of collateral assignments is crucial for effectively managing life insurance policies, especially when financing options need to be leveraged.