What is the function of a "collateral assignment" in life insurance?

The function of a "collateral assignment" in life insurance is primarily to pledge the death benefit to secure a loan. This process allows the policyholder to assign a portion of the insurance policy's death benefit to a lender as collateral for a loan. In the event of the policyholder's death, the lender is entitled to be paid from the proceeds of the policy up to the amount owed on the loan, which secures the lender's interests while allowing the policyholder to access necessary funds.

This mechanism provides a safeguard for lenders, ensuring that they have recourse in case the borrower defaults. Collateral assignments are often utilized in situations where individuals need to borrow money for various needs, such as business expenses, personal debts, or other financial obligations. By using the death benefit as collateral, individuals can leverage their life insurance policies in a strategic way to meet immediate financial needs without completely relinquishing control of the policy itself.