South Carolina Life and Health Practice Exam

What is a provision called that allows a policyowner to use ownership rights to secure a loan?

1. Assigned interest

2. Collaterization

3. Collateral assignment

4. Loan agreement

The correct answer is: Collateral assignment

The correct choice is "collateral assignment." This provision allows a policyowner to designate the rights of the life insurance policy as collateral for a loan, which can help secure financing. In practical terms, when a policyholder takes out a loan and uses their life insurance policy as collateral, they are providing assurance to the lender that the loan will be repaid. If the borrower fails to repay the loan, the lender may claim the policy benefits up to the amount owed. This is beneficial for both the lender, who has a secured interest, and the policyholder, who obtains loan funds without losing ownership of the policy. The use of the term "collateral assignment" specifically refers to this arrangement, emphasizing the temporary nature of the assignment—where ownership rights revert to the policyowner after the loan is repaid. Understanding this concept is crucial for navigating financial options related to insurance policies.