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An assignment of insurance is a process that is used to temporarily transfer or assign the benefits associated with some type of insurance plan. The most common example of this type of assignment is found with whole-life insurance polices when the cash value of the policy is used for collateral on a loan. For the duration of the loan, the lender has a claim on that cash value as well as the overall benefits of the plan up to the balance due on the loan.
With an assignment of insurance, the lender who accepts this arrangement as collateral for a loan has the primary claim on any proceeds that are paid on the life insurance plan in the event that the debtor should pass away before the loan is settled in full. Upon notification that the debtor has passed away, the lender invokes the assignment of insurance by filing a claim with the insurance company, ultimately receiving whatever amount of the life insurance benefits is necessary to pay off the outstanding balance due. Any remaining balance left after the debt is settled is then provided to the beneficiary designated by the policyholder.
One of the benefits provided by an assignment of insurance is the ability to secure a loan without the need to pledge other assets, such as a home. Depending on the amount of cash value present in the policy as well as the total amount of life insurance involved, this approach may also be preferable to some lenders, in that disbursements from the insurance company will often be easier than going through the necessary steps to gain control of property and sell it in order to settle a debt. For the debtors, the ability to use the insurance as collateral means that it is still possible to use other assets as desired, including selling them if necessary.
While an assignment of insurance is possible with various types of life insurance plans, this particular provision is usually not possible with other forms of insurance. Even within the scope of life insurance coverage, this type of strategy is normally found with whole-life policies and not with term insurance plans. The ability to make use of a life insurance plan as part of the collateral for a loan will vary, based on the lending laws and regulations that apply in the jurisdiction where the loan is granted. Even within the scope of those regulations, some lenders will not accept an assignment of insurance as a means of securing a personal or business loan.