What Is an Assignment Clause?

An assignment clause is a provision found in a life insurance policy that establishes if and how the rights and obligations of the covered party can be transferred to a third party. While many life insurance policies, as well as other types of contracts, do contain some sort of assignment clause, the conditions that must exist in order for the transfer to take place will vary. In addition, there are a number of contract models that will contain an assignment clause that essentially makes any type of transfer impossible.

One of the easiest ways to understand an assignment clause is to consider a whole life insurance policy that builds cash value over the years. In the event that the insured party wishes to use the cash value of the policy as collateral on a loan, it is necessary to consult the terms of the insurance contract itself, and make sure that the insurance company is willing to reassign rights to the cash value to the lender. Unless the terms of the clause will allow the cash value to be used as collateral on a loan, the lender will likely reject the use of this asset, making it necessary for the policy holder to pledge some other asset as collateral.

While whole life insurance plans do tend to include an assignment clause that provides for transferring rights and responsibilities under certain circumstances, it is important to note that the extent of that ability to reassign those benefits is usually limited by whatever laws and regulations apply to insurance coverage within the country where the policy is written. In addition, other forms of insurance may or may not include an assignment clause in the terms and conditions of the contract. For example, it is highly unlikely that any type of casualty or property insurance policies would include this type of clause.

Before choosing to take out a whole life insurance policy, the consumer should take the time to read all the provisions associated with the plan, including carefully reviewing the verbiage contained in the assignment clause. Doing so will help avoid any confusion or frustration later on in regard to transferring the rights or obligations of the policy to a third party. Along with considering the scope of the coverage and the amount of the premium, making sure you understand the provisions of the assignment clause should be high on the list of priorities when comparing several different life insurance plans.