What is a collateral assignment?

In a nutshell, a collateral assignment is when a policy serves as collateral for a loan. The policyholder can temporarily assign a lender to the policy as the primary beneficiary. Typically, a collateral assignment is required by a lender when approving a loan, so that if the insured dies with an outstanding balance on their loan, the lender can collect the amount needed to pay back the loan.

This is a temporary modification to the policy; should the balance on the loan be paid before the end of the term, the collateral assignment can be removed and the full death benefit will go to the originally designated beneficiary(ies).

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