Appears in our practice questions for: Life Insurance
A temporary, limited transfer of a life policy's rights to a creditor as security for a debt, with the assignee entitled to proceeds only up to the amount still owed. Once the debt is repaid the assignment ends and full rights revert to the owner; any remaining proceeds after the debt still go to the named beneficiary.
Practice questions using Collateral Assignment
Original questions written against the published FINRA and NASAA exam content outlines — not actual exam questions. Every choice is explained.
A life insurance policy may be transferred to another party through:
A.A collateral or absolute assignmentCorrect - the two assignment types.
B.The grace periodThe grace provision governs a late premium and keeps the policy from lapsing. It affects the timing of payment, not who owns the contract.
C.A dividend optionA dividend option directs what happens to a participating policy's divisible surplus. It decides where money goes, not who holds ownership of the contract.
D.Changing the insuredThe insured cannot be swapped out. The contract is written on one specific life and the mortality risk was underwritten on that person; transferring the policy moves ownership while the insured stays fixed.
Why: Ownership can be transferred via a collateral assignment (partial, for a loan) or an absolute assignment (complete).
A policyowner assigns her life policy to a bank as COLLATERAL for a $60,000 business loan, then dies with $45,000 still owed. Her named beneficiary receives:
A.The full face amount, with the bank unpaidWrong. The assignment secures the bank ahead of the beneficiary.
B.The face amount minus the $45,000 owed to the bankCorrect. The collateral assignment caps the bank's claim at the debt.
C.Nothing, because assignment transferred the entire policyWrong-but-tempting. TOTAL transfer describes an ABSOLUTE assignment, not collateral.
D.Only a refund of premiums paidWrong. Premium refunds have no role in death claims.
Why: Under a collateral assignment, proceeds first satisfy the outstanding obligation ($45,000), with the balance of the face amount flowing to the beneficiary; ownership rights otherwise remain with the policyowner. Citation: standard assignment law. Takeaway: collateral assignee takes the debt; beneficiary takes the rest.
A collateral assignment of a life policy:
A.Pledges the policy as loan collateral (partial)Correct - a limited, temporary pledge.
B.Doubles the benefitNo form of assignment changes the amount of coverage. A collateral assignment only determines who is paid first out of the proceeds that already exist.
C.Transfers full ownership permanentlyThat describes an absolute assignment. A collateral assignment is limited and conditional: the lender's claim is capped at the outstanding debt and vanishes when the loan is repaid, while the owner keeps every other policy right.
D.Cancels the policyPledging a policy as security depends on it staying in force, since a lapsed contract secures nothing. Surrender or lapse ends a policy; an assignment leaves it intact.
Why: A collateral assignment temporarily pledges the policy as loan collateral without transferring full ownership.
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