South Carolina Insurance Practice Exam

What is the primary benefit of a collateral assignment in life insurance?

1. Permanent transfer of ownership

2. Temporary transfer for security

3. Tax exclusion for beneficiaries

4. Increased coverage amount

The correct answer is: Temporary transfer for security

The primary benefit of a collateral assignment in life insurance is that it allows for a temporary transfer of rights associated with the policy to a lender or creditor as security for a loan or obligation. In this arrangement, the policyholder maintains ownership of the policy, but the rights are assigned to the lender for the duration of the loan. This means that if the policyholder fails to repay the loan, the lender has the right to claim the death benefit up to the amount owed. Collateral assignments are particularly useful in securing loans, as they provide reassurance to the lender while allowing the borrower to retain control over the policy. Once the loan is repaid, the assignment can be revoked, and the full rights to the policy revert back to the original owner, distinguishing it from a permanent transfer of ownership. In contrast, the other choices involve beneficial aspects of life insurance but do not pertain specifically to the concept of collateral assignment. Permanent transfer of ownership suggests a complete change of ownership rights, which does not encapsulate the temporary nature of a collateral assignment. Tax exclusion for beneficiaries is a general tax benefit that pertains to life insurance proceeds but is unrelated to the assignment process. Increased coverage amount could refer to purchasing additional insurance or riders, which is not relevant to the concept of