Texas General Lines — Life, Accident, Health and HMOTexas Statutes and Rules Specific to Life InsuranceMedium
A life insurance policy in Texas has an Assignment Clause. The policyowner, Sarah, wants to use her policy as collateral for a bank loan. Which type of assignment would be most appropriate for this purpose?
- AGratuitous Assignment
- BAbsolute Assignment
- CCollateral Assignment
- DConditional Assignment
Show answer & explanationAnswer & explanation
Correct answer: C. Collateral Assignment
A collateral assignment is used when a policy is pledged as security for a debt. The assignee (the bank) has rights to the policy only up to the amount of the outstanding loan, and the policyowner retains all other rights.
Why the other options are wrong
- A. Gratuitous assignment is a gift and doesn't involve a debt or collateral purpose.
- B. Absolute assignment transfers all rights of ownership permanently to another party, which is not suitable for a temporary loan collateral.
- D. Conditional assignment is not a standard term for this type of transaction; assignments are typically absolute or collateral.
Collateral Assignment (Life Insurance)
A temporary and partial transfer of the rights of a life insurance policy to another party, typically a creditor, as security for a debt. The assignee's rights are limited to the amount of the outstanding debt.
- Used as security for a loan.
- Temporary transfer of partial rights.
- Policyowner retains residual ownership.
- Assignee's rights limited to outstanding debt.
Memory trick: Collateral for a loan, a partial claim, not alone.