Which arrangement allows a lender to hold a temporary interest in a life insurance policy as security for a loan?

• A. Collateral assignment
• B. Absolute assignment
• C. Beneficiary designation change
• D. Trust assignment

Answer: (A)

Collateral assignment allows the lender to hold a security interest in the policy’s benefits while the policy owner retains ownership. This arrangement gives the lender rights to the policy’s death benefit up to the amount of the loan to secure repayment. If the loan is repaid, the assignment is released, and the owner’s full rights remain intact. If the borrower dies before repayment, the death benefit is paid to the lender to cover the outstanding loan balance, with any excess going to the owner or other beneficiaries.

This differs from an absolute assignment, which would transfer ownership of the policy to the lender; a beneficiary designation change, which merely alters who receives the proceeds; and a trust assignment, which involves a more complex trust arrangement not typically used to secure a standard loan.