What is the purpose of collateral assignment in insurance?

The purpose of collateral assignment in insurance is primarily to secure a loan with the insurance policy. When a policyholder takes out a loan, especially for significant expenses like business needs or real estate, they may use their life insurance policy as collateral. In this arrangement, the lender would have a claim on the policy proceeds to the extent of the outstanding loan balance. This provides the lender with a level of security, ensuring that if the policyholder were to default on the loan, the lender could recover their amount directly from the insurance payout.

This process does not affect the policyholder’s ownership rights in the policy nor does it change the coverage itself; the policyholder remains the insured individual, and they still receive the policy benefits as long as they adhere to the loan agreement and maintain premium payments. The use of collateral assignment highlights an important financial tool within the life insurance framework, enabling policyholders to leverage their insurance for liquidity while ensuring that lenders have a secured interest.