Maryland Life and Health Insurance License Practice Exam

What is the term for a provision that allows a policy owner to temporarily give up ownership rights to secure a loan?

1. Collateral assignment

2. Permanent assignment

3. Temporary waiver

4. Loan exclusion

The correct answer is: Collateral assignment

The correct term for a provision that allows a policy owner to temporarily give up ownership rights to secure a loan is known as collateral assignment. In this context, collateral assignment allows the policyholder to pledge the insurance policy as collateral for a loan, which means that they are temporarily transferring certain rights associated with the policy to the lender. This typically happens when the policyholder needs to secure a loan and offers the life insurance policy as a form of security. Collateral assignment is advantageous because it does not require the policyholder to relinquish complete control over their policy; they retain ownership and can continue to manage the policy while the lender has a claim against the policy's death benefit up to the loan amount in the event of the policyholder's death. This type of assignment is typically also revocable, meaning that the policyholder can restore their full rights to the policy once the loan is paid off. Understanding collateral assignment is important in the context of life insurance, as it demonstrates how individuals can leverage their policies for financial needs without permanently altering ownership. Other options, such as permanent assignment or loan exclusion, do not accurately represent this arrangement as they imply more extensive or different rights changes that are not temporary in nature.