Which of the following describes collateral assignment?

• A. The owner deposits funds as collateral
• B. The policy is canceled
• C. The owner temporarily assigns policy to a lender as collateral for a loan
• D. The insurer pays the loan

Answer: (C)

Collateral assignment is using a life policy as security for a loan. The policy owner still owns the policy, but a lender can claim the policy’s proceeds to help repay the loan if the insured dies or if the loan is in default. Practically, when death occurs, the death benefit first goes to satisfy the outstanding loan to the lender, and any remaining amount goes to the policy’s beneficiary. The arrangement is usually temporary and can be canceled once the loan is repaid, restoring full control to the owner. This matches the description of temporarily assigning the policy to a lender as collateral for a loan.