assignment insurance definition

Assignment in Insurance Policy | Meaning | Explanation | Types

Table of Contents

• 1 What is Assignment in an Insurance Policy?
• 2 Who can make an assignment?
• 3 What happens to the ownership of the policy upon Assignment?
• 4 Can assignment be changed or cancelled?
• 5 What happens if the assignment dies?
• 6 What is the procedure to make an assignment?
• 7 Is it necessary to Inform the insurer about assignment?
• 8 Can a policy be assigned to a minor person?
• 9 Who pays premium when a policy is assigned?
• 10.1 1. Conditional Assignment
• 10.2 2. Absolute Assignment

What is Assignment in an Insurance Policy?

Assignment means a complete transfer of the ownership of the policy to some other person. Usually assignment is done for the purpose of raising a loan from a bank or a financial institution .

Assignment is governed by Section 38 of the Insurance Act 1938 in India. Assignment can also be done in favour of a close relative when the policyholder wishes to give a gift to that relative. Such an assignment is done for “natural love and affection”. An example, a policyholder may assign his policy to his sister who is handicapped.

Who can make an assignment?

A policyholder who has policy on his own life can assign the policy to another person. However, a person to whom a policy has been assigned can reassign the policy to the policyholder or assign it to any other person. A nominee cannot make an assignment of the policy. Similarly, an assignee cannot make a nomination on the policy which is assigned to him.

What happens to the ownership of the policy upon Assignment?

When a policyholder assign a policy, he loses all control on the policy. It is no longer his property. It is now the assignee’s property whether the policyholder is alive or dead, the assignee alone will get the policy money from the insurance company.

If the assignee dies, then his (assignee’s) legal heirs will be entitled to the policy money.

Can assignment be changed or cancelled?

An assignment cannot be changed or cancelled. The assignee can of course, reassign the policy to the policyholder who assigned it to him. He can also assign the policy to any other person because it is now his property. We can think of a bank reassigning the policy to the policyholder when their loan is repaid.

What happens if the assignment dies?

If the assignee dies, the assignment does not get cancelled. The legal heirs of the assignee become entitled to the policy money. Assignment is a legal transfer of all the interests the policyholder has in the policy to the assignee.

What is the procedure to make an assignment?

Assignment can be made only after issue of the policy bond. The policyholder can either write out the wording on the policy bond (endorsement) or write it on a separate paper and get it stamped. (Stamp value is the same, as the stamp required for the policy — Twenty paise per one thousand sum assured). When assignment is made by an endorsement on the policy bond, there is no need for stamp because the policy is already stamped.

Is it necessary to Inform the insurer about assignment?

Yes, it is necessary to give information about assignment to the insurance company. The insurer will register the assignment in its records and from then on recognize the assignee as the owner of the policy. If someone has made more than one assignment, then the date of the notice will decide which assignment has priority. In the case of reassignment also, notice is necessary.

Can a policy be assigned to a minor person?

Assignment can be made in favour of a minor person. But it would be advisable to appoint a guardian to receive the policy money if it becomes due during the minority of the assignee.

Who pays premium when a policy is assigned?

When a policy is assigned normally, the assignee should pay the premium, because the policy is now his property. In practice, however, premium is paid by the assignor (policyholder) himself. When a bank gives a loan and takes the assignment of a policy a security, it will ask the assignor himself to pay the premium and keep it in force. In the case of an assignment as a gift, the assignor would like to pay the premium because he has gifted the policy.

Types of assignment

Assignment may take two forms:

• Conditional Assignment.
• Absolute Assignment.

1. Conditional Assignment

It would be useful where the policyholder desires the benefit of the policy to go to a near relative in the event of his earlier death. It is usually effected for consideration of natural love and affection. It generally provides for the right to revert the policyholder in the event of the assignee predeceasing the policyholder or the policyholder surviving to the date of maturity.

2. Absolute Assignment

This assignment is generally made for valuable consideration. It has the effect of passing the title in the policy absolutely to the assignee and the policyholder in no way retains any interest in the policy. The absolute assignee can deal with the policy in any manner he likes and may assign or transfer his interest to another person.

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What is an assignment of benefits?

The last time you sought medical care, you likely made an appointment with your provider, got the treatment you needed, paid your copay or deductible, and that was it. No paperwork, no waiting to be reimbursed; your doctor received payment from your insurance company and you both went on with your lives.

This is how most people receive health care in the U.S. This system, known as assignment of benefits or AOB, is now being used with other types of insurance, including auto and homeowners coverage . 

What is an assignment of benefits?  

An AOB is a legal agreement that allows your insurance company to directly pay a third party for services performed on your behalf. In the case of health care, it could be your doctor or another medical professional providing care. With a homeowners, renters, or auto insurance claim, the third party could be a contractor, auto repair shop, or other facility.

Assignment of benefits is legal, thanks to a concept known as freedom of contract, which says two parties may make a private agreement, including the forfeiture of certain rights, and the government may not interfere. There are exceptions, making freedom of contract something less than an absolute right. For example, the contract may not violate the law or contain unfair terms.

Not all doctors or contractors utilize AOBs. Therefore, it’s a good idea to make sure the doctor or service provider and you are on the same page when it comes to AOBs before treatment or work begins.

How an AOB works

The function of an AOB agreement varies depending on the type of insurance policy involved, the healthcare provider, contractor, or service provider, and increasingly, state law. Although an AOB is normal in health insurance, other applications of assignment of benefits have now included the auto and homeowners insurance industry.

Because AOBs are common in health care, you probably don’t think twice about signing a piece of paper that says “assignment of benefits” across the top. But once you sign it, you’re likely turning over your right to deal with your insurance company regarding service from that provider. Why would you do this? 

According to Dr. David Berg of Redirect Health , the reason is simple: “Without an AOB in place, the patient themselves would be responsible for paying the cost of their service and would then file a claim with their insurance company for reimbursement.”

With homeowners or auto insurance, the same rules apply. Once you sign the AOB, you are effectively out of the picture. The contractor who reroofs your house or the mechanic who rebuilds your engine works with your insurance company by filing a claim on your behalf and receiving their money without your help or involvement.

“Each state has its own rules, regulations, and permissions regarding AOBs,” says Gregg Barrett, founder and CEO of WaterStreet , a cloud-based P&C insurance administration platform. “Some states require a strict written breakdown of work to be done, while others allow assignment of only parts of claims.” 

Within the guidelines of the specific insurance rules for AOBs in your state, the general steps include:

• You and your contractor draw up an AOB clause as part of the contract.
• The contract stipulates the exact work that will be completed and all necessary details.
• The contractor sends the completed AOB to the insurance company where an adjuster reviews, asks questions, and resolves any discrepancies.
• The contractor’s name (or that of an agreed-upon party) is listed to go on the settlement check.

After work is complete and signed off, the insurer will issue the check and the claim will be considered settled.

Example of an assignment of benefits  

If you’re dealing with insurance, how would an AOB factor in? Let’s take an example. “Say you have a water leak in the house,” says Angel Conlin, chief insurance officer at Kin Insurance . “You call a home restoration company to stop the water flow, clean up the mess, and restore your home to its former glory. The restoration company may ask for an assignment of benefits so it can deal directly with the insurance company without your input.”

In this case, by eliminating the homeowner, whose interests are already represented by an experienced insurance adjustor, the AOB reduces redundancy, saves time and money, and allows the restoration process to proceed with much greater efficiency.

When would you need to use an assignment of benefits?  

An AOB can simplify complicated and costly insurance transactions and allow you to turn these transactions over to trusted experts, thereby avoiding time-consuming negotiations. 

An AOB also frees you from paying the entire bill upfront and seeking reimbursement from your insurance company after work has been completed or services rendered. Since you are not required to sign an assignment of benefits, failure to sign will result in you paying the entire medical bill and filing for reimbursement. The three most common uses of AOBs are with health insurance, car insurance, and homeowners insurance.

Assignment of benefits for health insurance

As discussed, AOBs in health insurance are commonplace. If you have health insurance, you’ve probably signed AOBs for years. Each provider (doctor) or practice requires a separate AOB. From your point of view, the big advantages of an AOB are that you receive medical care, your doctor and insurance company work out the details and, in the event of a disagreement, those two entities deal with each other. 

Assignment of benefits for car owners

If your car is damaged in an accident and needs extensive repair, the benefits of an AOB can quickly add up. Not only will you have your automobile repaired with minimal upfront costs to you, inconvenience will be almost nonexistent. You drop your car off (or have it towed), wait to be called, told the repair is finished, and pick it up. Similar to a health care AOB, disagreements are worked out between the provider and insurer. You are usually not involved.

Assignment of benefits for homeowners  

When your home or belongings are damaged or destroyed, your primary concern is to “return to normal.” You want to do this with the least amount of hassle. An AOB allows you to transfer your rights to a third party, usually a contractor, freeing you to deal with the crisis at hand.

When you sign an AOB, your contractor can begin immediately working on damage repair, shoring up against additional deterioration, and coordinating with various subcontractors without waiting for clearance or communication with you.

The fraud factor

No legal agreement, including an AOB, is free from the possibility of abuse or fraud. Built-in safeguards are essential to ensure the benefits you assign to a third party are as protected as possible.

In terms of what can and does go wrong, the answer is: plenty. According to the National Association of Mutual Insurance Companies (NAMICs), examples of AOB fraud include inflated invoices or charges for work that hasn’t been done. Another common tactic is to sue the insurance company, without the policyholder’s knowledge or consent, something that can ultimately result in the policyholder being stuck with the bill and higher insurance premiums due to losses experienced by the insurer.

State legislatures have tried to protect consumers from AOB fraud and some progress has been made. Florida, for example, passed legislation in 2019 that gives consumers the right to rescind a fraudulent contract and requires that AOB contracts include an itemized description of the work to be done. Other states, including North Dakota, Kansas, and Iowa have all signed NAMIC-backed legislation into law to protect consumers from AOB fraud.

The National Association of Insurance Commissioners (NAIC), offers advice for consumers to help avoid AOB fraud and abuse:

• File a claim with your insurer before you hire a contractor. This ensures you know what repairs need to be made.
• Don’t pay in full upfront. Legitimate contractors do not require it.
• Get three estimates before selecting a contractor.
• Get a full written contract and read it carefully before signing.
• Don’t be pressured into signing an AOB. You are not required to sign an AOB.

Pros and cons of an assignment of benefits  

The advantages and disadvantages of an AOB agreement depend largely on the amount and type of protection your state’s insurance laws provide.  

Pros of assignment of benefits

With proper safeguards in place to reduce opportunities for fraud, AOBs have the ability to streamline and simplify the insurance claims process.

• An AOB frees you from paying for services and waiting for reimbursement from your insurer.
• Some people appreciate not needing to negotiate with their insurer.
• You are not required to sign an AOB.

Cons of assignment of benefits

As with most contracts, AOBs are a double-edged sword. Be aware of potential traps and ask questions if you are unsure.

• Signing an AOB could make you the victim of a scam without knowing it until your insurer refuses to pay.
• An AOB doesn’t free you from the ultimate responsibility to pay for services rendered, which could drag you into expensive litigation if things go south.
• Any AOB you do sign is legally binding.

The takeaway  

An AOB, as the health insurance example shows, can simplify complicated and costly insurance transactions and help consumers avoid time-consuming negotiations. And it can save upfront costs while letting experts work out the details.

It can also introduce a nightmare scenario laced with fraud requiring years of costly litigation. Universal state-level legislation with safeguards is required to avoid the latter. Until that is in place, your best bet is to work closely with your insurer when signing an AOB. Look for suspicious or inflated charges when negotiating with contractors, providers, and other servicers.

EDITORIAL DISCLOSURE : The advice, opinions, or rankings contained in this article are solely those of the Fortune Recommends ™ editorial team. This content has not been reviewed or endorsed by any of our affiliate partners or other third parties.

• Construction Accidents

Practice Areas

Assignment of benefits: what you need to know.

• August 17, 2022
• Steven Schwartzapfel

Insurance can be useful, but dealing with the back-and-forth between insurance companies and contractors, medical specialists, and others can be a time-consuming and ultimately unpleasant experience. You want your medical bills to be paid without having to act as a middleman between your healthcare provider and your insurer.

However, there’s a way you can streamline this process. With an assignment of benefits, you can designate your healthcare provider or any other insurance payout recipient as the go-to party for insurance claims. While this can be convenient, there are certain risks to keep in mind as well.

Below, we’ll explore what an assignment of insurance benefits is (as well as other forms of remediation), how it works, and when you should employ it. For more information, or to learn whether you may have a claim against an insurer, contact Schwartzapfel Lawyers now at 1-516-342-2200 .

What Is an Assignment of Benefits?

An assignment of benefits (AOB) is a legal process through which an insured individual or party signs paperwork that designates another party like a contractor, company, or healthcare provider as their insurance claimant .

Suppose you’re injured in a car accident and need to file a claim with your health insurance company for medical bills and related costs. However, you also need plenty of time to recover. The thought of constantly negotiating between your insurance company, your healthcare provider, and anyone else seems draining and unwelcome.

With an assignment of benefits, you can designate your healthcare provider as your insurance claimant. Then, your healthcare provider can request insurance payouts from your healthcare insurance provider directly.

Through this system, the health insurance provider directly pays your physician or hospital rather than paying you. This means you don’t have to pay your healthcare provider. It’s a streamlined, straightforward way to make sure insurance money gets where it needs to go. It also saves you time and prevents you from having to think about insurance payments unless absolutely necessary.

What Does an Assignment of Benefits Mean?

An AOB means that you designate another party as your insurance claimant. In the above example, that’s your healthcare provider, which could be a physician, hospital, or other organization.

With the assignment of insurance coverage, that healthcare provider can then make a claim for insurance payments directly to your insurance company. The insurance company then pays your healthcare provider directly, and you’re removed as the middleman.

As a bonus, this system sometimes cuts down on your overall costs by eliminating certain service fees. Since there’s only one transaction — the transaction between your healthcare provider and your health insurer — there’s only one set of service fees to contend with. You don’t have to deal with two sets of service fees from first receiving money from your insurance provider, then sending that money to your healthcare provider.

Ultimately, the point of an assignment of benefits is to make things easier for you, your insurer, and anyone else involved in the process.

What Types of Insurance Qualify for an Assignment of Benefits?

Most types of commonly held insurance can work with an assignment of benefits. These insurance types include car insurance, healthcare insurance, homeowners insurance, property insurance, and more.

Note that not all insurance companies allow you to use an assignment of benefits. For an assignment of benefits to work, the potential insurance claimant and the insurance company in question must each sign the paperwork and agree to the arrangement. This prevents fraud (to some extent) and ensures that every party goes into the arrangement with clear expectations.

If your insurance company does not accept assignments of benefits, you’ll have to take care of insurance payments the traditional way. There are many reasons why an insurance company may not accept an assignment of benefits.

To speak with a Schwartzapfel Lawyers expert about this directly, call 1-516-342-2200 for a free consultation today. It will be our privilege to assist you with all your legal questions, needs, and recovery efforts.

Who Uses Assignments of Benefits?

Many providers, services, and contractors use assignments of benefits. It’s often in their interests to accept an assignment of benefits since they can get paid for their work more quickly and make critical decisions without having to consult the insurance policyholder first.

Imagine a circumstance in which a homeowner wants a contractor to add a new room to their property. The contractor knows that the scale of the project could increase or shrink depending on the specifics of the job, the weather, and other factors.

If the homeowner uses an assignment of benefits to give the contractor rights to make insurance claims for the project, that contractor can then:

• Bill the insurer directly for their work. This is beneficial since it ensures that the contractor’s employees get paid promptly and they can purchase the supplies they need.
• Make important decisions to ensure that the project completes on time. For example, a contract can authorize another insurance claim for extra supplies without consulting with the homeowner beforehand, saving time and potentially money in the process.

Practically any company or organization that receives payments from insurance companies may choose to take advantage of an assignment of benefits with you. Example companies and providers include:

• Ambulance services
• Drug and biological companies
• Lab diagnostic services
• Hospitals and medical centers like clinics
• Certified medical professionals such as nurse anesthetists, nurse midwives, clinical psychologists, and others
• Ambulatory surgical center services
• Permanent repair and improvement contractors like carpenters, plumbers, roofers, restoration companies, and others
• Auto repair shops and mechanic organizations

Advantages of Using an Assignment of Benefits

An assignment of benefits can be an advantageous contract to employ, especially if you believe that you’ll need to pay a contractor, healthcare provider, and/or other organization via insurance payouts regularly for the near future.

These benefits include but are not limited to:

• Save time for yourself. Again, imagine a circumstance in which you are hospitalized and have to pay your healthcare provider through your health insurance payouts. If you use an assignment of benefits, you don’t have to make the payments personally or oversee the insurance payouts. Instead, you can focus on resting and recovering.
• Possibly save yourself money in the long run. As noted above, an assignment of benefits can help you circumvent some service fees by limiting the number of transactions or money transfers required to ensure everyone is paid on time.
• Increased peace of mind. Many people don’t like having to constantly think about insurance payouts, contacting their insurance company, or negotiating between insurers and contractors/providers. With an assignment of benefits, you can let your insurance company and a contractor or provider work things out between them, though this can lead to applications later down the road.

Because of these benefits, many recovering individuals, car accident victims, homeowners, and others utilize AOB agreements from time to time.

Risks of Using an Assignment of Benefits

Worth mentioning, too, is that an assignment of benefits does carry certain risks you should be aware of before presenting this contract to your insurance company or a contractor or provider. Remember, an assignment of benefits is a legally binding contract unless it is otherwise dissolved (which is technically possible).

The risks of using an assignment of benefits include:

• You give billing control to your healthcare provider, contractor, or another party. This allows them to bill your insurance company for charges that you might not find necessary. For example, a home improvement contractor might bill a homeowner’s insurance company for an unnecessary material or improvement. The homeowner only finds out after the fact and after all the money has been paid, resulting in a higher premium for their insurance policy or more fees than they expected.
• You allow a contractor or service provider to sue your insurance company if the insurer does not want to pay for a certain service or bill. This can happen if the insurance company and contractor or service provider disagree on one or another billable item. Then, you may be dragged into litigation or arbitration you did not agree to in the first place.
• You may lose track of what your insurance company pays for various services . As such, you could be surprised if your health insurance or other insurance premiums and deductibles increase suddenly.

Given these disadvantages, it’s still wise to keep track of insurance payments even if you choose to use an assignment of benefits. For example, you might request that your insurance company keep you up to date on all billable items a contractor or service provider charges for the duration of your treatment or project.

For more on this and related topic, call Schwartzapfel Lawyers now at 1-516-342-2200 .

How To Make Sure an Assignment of Benefits Is Safe

Even though AOBs do carry potential disadvantages, there are ways to make sure that your chosen contract is safe and legally airtight. First, it’s generally a wise idea to contact knowledgeable legal representatives so they can look over your paperwork and ensure that any given assignment of benefits doesn’t contain any loopholes that could be exploited by a service provider or contractor.

The right lawyer can also make sure that an assignment of benefits is legally binding for your insurance provider. To make sure an assignment of benefits is safe, you should perform the following steps:

• Always check for reviews and references before hiring a contractor or service provider, especially if you plan to use an AOB ahead of time. For example, you should stay away if a contractor has a reputation for abusing insurance claims.
• Always get several estimates for work, repairs, or bills. Then, you can compare the estimated bills and see whether one contractor or service provider is likely to be honest about their charges.
• Get all estimates, payment schedules, and project schedules in writing so you can refer back to them later on.
• Don’t let a service provider or contractor pressure you into hiring them for any reason . If they seem overly excited about getting started, they could be trying to rush things along or get you to sign an AOB so that they can start issuing charges to your insurance company.
• Read your assignment of benefits contract fully. Make sure that there aren’t any legal loopholes that a contractor or service provider can take advantage of. An experienced lawyer can help you draft and sign a beneficial AOB contract.

Can You Sue a Party for Abusing an Assignment of Benefits?

Sometimes. If you believe your assignment of benefits is being abused by a contractor or service provider, you may be able to sue them for breaching your contract or even AOB fraud. However, successfully suing for insurance fraud of any kind is often difficult.

Also, you should remember that a contractor or service provider can sue your insurance company if the insurance carrier decides not to pay them. For example, if your insurer decides that a service provider is engaging in billing scams and no longer wishes to make payouts, this could put you in legal hot water.

If you’re not sure whether you have grounds for a lawsuit, contact Schwartzapfel Lawyers today at 1-516-342-2200 . At no charge, we’ll examine the details of your case and provide you with a consultation. Don’t wait. Call now!

Assignment of Benefits FAQs

Which states allow assignments of benefits.

Every state allows you to offer an assignment of benefits to a contractor and/or insurance company. That means, whether you live in New York, Florida, Arizona, California, or some other state, you can rest assured that AOBs are viable tools to streamline the insurance payout process.

Can You Revoke an Assignment of Benefits?

Yes. There may come a time when you need to revoke an assignment of benefits. This may be because you no longer want the provider or contractor to have control over your insurance claims, or because you want to switch providers/contractors.

To revoke an assignment of benefits agreement, you must notify the assignee (i.e., the new insurance claimant). A legally solid assignment of benefits contract should also include terms and rules for this decision. Once more, it’s usually a wise idea to have an experienced lawyer look over an assignment of benefits contract to make sure you don’t miss these by accident.

Contact Schwartzapfel Lawyers Today

An assignment of benefits is an invaluable tool when you need to streamline the insurance claims process. For example, you can designate your healthcare provider as your primary claimant with an assignment of benefits, allowing them to charge your insurance company directly for healthcare costs.

However, there are also risks associated with an assignment of benefits. If you believe a contractor or healthcare provider is charging your insurance company unfairly, you may need legal representatives. Schwartzapfel Lawyers can help.

As knowledgeable New York attorneys who are well-versed in New York insurance law, we’re ready to assist with any and all litigation needs. For a free case evaluation and consultation, contact Schwartzapfel Lawyers today at 1-516-342-2200 !

Schwartzapfel Lawyers, P.C. | Fighting For You™™

What Is an Insurance Claim? | Experian

What is assignment of benefits, and how does it impact insurers? | Insurance Business Mag

Florida Insurance Ruling Sets Precedent for Assignment of Benefits | Law.com

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Post-Loss Assignments of Claims Under Insurance Policies

In the settlement of lawsuits involving insured claims, it is not uncommon that one condition of the settlement is that the defendant assign his or her claims under all applicable insurance policies to the party that filed suit.

Indeed, it is frequently the case that the defendant, particularly when the defendant is an individual, has a limited ability to pay a judgment and insurance coverage offers the best opportunity for a recovery by the suing party. Usually, such settlements are made without any serious thought being given to whether the defendant’s claim against its insurer is assignable; the assumption being that it is assignable.

However, insurance policies generally have anti-assignment clauses which prohibit the assignment of the policy, or an interest in the policy, without the insurer’s consent. These clauses come into play in determining the validity or enforceability of the assignment of a claim under an insurance policy and should be considered when such an assignment is part of a settlement.

When considering the enforceability of anti-assignment clauses in insurance policies, the courts generally draw a distinction between an assignment made prior to the occurrence of a covered loss (a “pre-loss” assignment) and an assignment made after the occurrence of a covered loss (a “post-loss” assignment).

In analyzing pre-loss assignments, the courts recognize that requiring an insurer to provide coverage to an assignee of its policy prior to the occurrence of a covered loss would place the insurer in the position of covering a party with whom it had not contracted nor been allowed to properly underwrite to assess the risks posed by that potential insured, and, accordingly, determine the appropriate premium to charge for the risks being undertaken or choose to decline coverage.

Post-loss assignments, on the other hand, take place after the insurer’s obligations under its policy have become fixed by the occurrence of a covered loss, thus the risk factors applicable to the assignee are irrelevant with regard to the covered loss in question. For these reasons, the majority of the courts enforce anti-assignment clauses to prohibit or restrict pre-loss assignments, but refuse to enforce anti-assignment clauses to prohibit or restrict post-loss assignments.

Katrina Cases

The Louisiana Supreme Court, which had not previously addressed the enforceability of anti-assignment clauses for post-loss assignments, was recently confronted with this issue in the In re: Katrina Canal Breaches Litigation, litigation involving consolidated cases arising out of Hurricane Katrina. The issue arose as a result of a lawsuit brought by the State of Louisiana as the assignee of claims under numerous insurance policies as part of the “Road Home” Program. The Road Home Program was set up following Hurricanes Katrina and Rita to distribute federal funds to homeowners suffering damage from the hurricanes. In return for receiving a grant of up to $150,000, homeowners were required to execute a Limited Subrogation/Assignment agreement, which provided in pertinent part:

Pursuant to these Limited Subrogation/Assignments, the State of Louisiana brought suit against more than 200 insurance companies to recover funds dispensed under the Road Home Program. The suit was removed to Federal Court under the Class Action Fairness Act and the insurers filed motions to dismiss, arguing that the assignments to the State of Louisiana were invalid under the anti-assignment clauses in the homeowner policies at issue.

On appeal, the United States Fifth Circuit Court of Appeals certified the following question to the Louisiana Supreme Court: “Does an anti-assignment clause in a homeowner’s insurance policy, which by its plain terms purports to bar any assignment of the policy or an interest therein without the insurer’s consent, bar an insured’s post-loss assignment of the insured’s claims under the policy when such an assignment transfers contractual obligations, not just the right to money due?”

In answering this question, the Louisiana Supreme Court began by noting that, as a general matter, contractual rights are assignable unless the law, the contract terms or the nature of the contract preclude assignment. Specific to the certified question, Louisiana Civil Code article 2653 provides that a right “cannot be assigned when the contract from which it arises prohibits the assignment of that right.” The Louisiana Supreme Court observed that the language of article 2653 is broad and, on its face, applies to all assignments, including post-loss assignments of insurance claims. The Court, therefore, construed the issue confronting it as whether Louisiana public policy would enforce an anti-assignment clause to preclude post-loss assignments of claims under insurance policies.

In addressing the public policy question, the Louisiana Supreme Court recognized the distinction between pre-loss assignments and post-loss assignments discussed by courts from other states and noted that the prevailing view was that anti-assignment clauses were invalid and/or unenforceable when applied to post-loss assignments. Notwithstanding this weight of authority, the Louisiana Supreme Court stated:

“[W]hile the Louisiana legislature has clearly indicated an intent to allow parties freedom to assign contractual rights, by enacting La. C.C. art. 2653, it has also clearly indicated an intent to allow parties freedom to contractually prohibit assignment of rights. We recognize the vast amount of national jurisprudence distinguishing between pre-loss and post-loss assignments and rejecting restrictions on post-loss assignments, however we find no public policy in Louisiana favoring assignability of claims over freedom of contract.”

Thus, Court refused to invalidate the enforceability of the anti-assignment clauses to the post-loss assignments before it based on public policy, adding that public policy determinations are better suited to the legislature.

Nonetheless, after having recognized the general enforceability of anti-assignment clauses to post-loss assignments, the Court immediately placed limits on when those clauses would be applicable, stating that to be applicable, they “must clearly and unambiguously express that the non-assignment clause applies to post-loss assignments.” The Court refused “to formulate a test consisting of specific terms or words,” which would satisfy this condition and remanded the case to the federal courts to determine whether the individual anti-assignment clauses in the various policies were sufficiently clear and explicit to be enforced with respect to post-loss assignments at issue.

A Broad Application

It should be noted that the Court’s opinion appears to apply broadly to all post-loss assignments irrespective of what specific rights are being assigned, despite the fact that the certified question was narrower and asked only about the applicability of a post-loss assignment where the assignment “transfers contractual obligations, not just the right to money due.”

In a footnote at the beginning of its opinion, the Louisiana Supreme Court observed that in certifying the question to it, the Fifth Circuit “disclaimed any intent” that the Court “confine its reply to the precise form or scope of the legal questions certified.” The footnote indicates that the Court’s opinion was not intended to be limited to only those post-loss assignments involving the assignment of contractual obligations.

Louisiana has departed from the majority view in holding that as a matter of general law, anti-assignment clauses are not inherently void with regard to post-loss assignments. However, it may be that in practical application, the results of individual cases may well be consistent with the majority rule of not enforcing anti-assignment clauses with regard to post-loss assignments because Louisiana courts may be reluctant to find that the anti-assignment clauses are sufficiently “clear and explicit” unless they specifically state that they apply to post-loss assignments, notwithstanding the Louisiana Supreme Court’s unwillingness to “formulate a test consisting of specific terms or words.”

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Assignment of benefits

Assignment of benefits is an agreement that gives your claims benefits to someone else.

What is an assignment of benefits?

An assignment of benefits (or AOB for short) is an agreement that gives your claims benefits, and in some instances complete control of your claim, to someone else. It’s usually used so that a contractor can "stand in your shoes" and file a claim, make decisions about repairs, and collect insurance payments from your insurance company directly for covered repairs. In some states, the contractor will even file a lawsuit against your insurer as your assignee.

Why do homeowners agree to an assignment of benefits?

Homeowners may sign an assignment of benefits form because they think it’s more convenient and efficient than dealing with the claims process firsthand.

Once a contractor has been assigned your benefits, they tell the insurance company what work they believe is required and negotiate the claim. For example, say you have a water leak in the house. You call a home restoration company to stop the water flow, clean up the mess, and restore your home to its former glory. The restoration company may ask for an assignment of benefits so it can deal directly with the insurance company without your input. That may sound like a relief at first glance – someone else can deal with all that!

But signing away your rights in the claims process may not be worth the risk.

Assignment of benefits in Florida: a case of rampant fraud

Because the assignment of benefits takes control out of the homeowner’s hands, insurance fraud is a major concern. Some contractors may take advantage of the situation and inflate repair needs and costs or bill for work that was never completed. They may also hire attorneys to sue the insurance company if it does not pay the full amount of their estimate or denies claims.

These lawsuits became a huge problem in Florida – by 2018, there were 135,000 AOB lawsuits , a 70 percent increase in 15 years. On the whole, the FBI estimates fraudulent claims account for nearly $6 billion of the $80 billion appropriated for post-hurricane reconstruction.

Florida eventually passed a bill in 2019 to curb the abuse of the assignment of benefits.

Ultimately, AOB fraud hurts homeowners the most. It increases homeowners insurance rates across the board, and you may be stuck with incomplete work and no recourse.

What responsibilities does the AOB contractor have?

Once you sign an AOB, a contractor has full power to make all decisions about the claim without consulting you. The assignment of benefits gives contractors the ability to:

• File the insurance claim .
• Work directly with insurance claims adjusters.
• Make repair decisions.
• Complete repairs.
• Directly bill the insurance carrier for all work completed.
• Sue your insurance company regarding your claim.

Sometimes the assignment of benefits limits the scope of the work the contractor was hired for. For example, say your home has a leaky pipe. You may hire a plumber to fix the leak, a remediation company to dry the walls and carpet, and a general contractor to replace the bathroom cabinets. Each of the three contractors may have a respective assignment of benefits for their part of the job.

How assignment of benefits impact homeowners

Under some circumstances, an assignment of benefits agreement could work out for homeowners who don’t want to handle their insurance claim. If the contractor is reputable, performs the work, and knows what information the insurance company needs, it can be a big help.

For example:

• The claims adjuster will work directly with the contractor.
• The contractor would handle remediation and repairs.
• The contractor would bill the insurance company, not the homeowner.

AOB arrangements only work for covered damage in need of repair. If you must replace belongings or appliances, you’d still need to work directly with your insurer and payments would go to you.

Protecting yourself in an assignment of benefits agreement

Don’t sign an assignment of benefits agreement right off the bat. Before you hire any contractor:

• Get multiple quotes.
• Check references, licenses, and their insurance.
• Get written estimates for potential work.
• Get a guarantee to back the workmanship.
• Make sure you get to approve the completed work.
• Request copies of all paperwork sent to your insurance company.
• Require that the contractor show you the documents you are actually signing.

You might be tempted to hire the first contractor you find, but you save yourself headaches if you do some due diligence before signing an assignment of benefits. Great contractors use this to expedite repairs and spare you some work. Take a beat to find that great contractor .

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Financial Tips, Guides & Know-Hows

Home > Finance > What Is Collateral Assignment Of Life Insurance

What Is Collateral Assignment Of Life Insurance

Published: November 22, 2023

Discover the benefits of collateral assignment of life insurance and how it can impact your finance. Gain valuable insights into this powerful financial strategy.

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Table of Contents

Introduction, definition of collateral assignment of life insurance, how collateral assignment works, reasons for using collateral assignment of life insurance, benefits and drawbacks of collateral assignment of life insurance, comparison with other forms of collateral, examples of collateral assignment of life insurance, important considerations before using collateral assignment.

When it comes to securing a loan, financial institutions often require borrowers to provide collateral as a form of security. Collateral helps mitigate the lender’s risk by providing an asset that can be seized and sold in the event of default. While real estate and vehicles are common forms of collateral, there is another valuable asset that can be used – life insurance.

In the world of finance, the collateral assignment of life insurance has gained popularity as a means of securing loans. This unique strategy allows borrowers to use the cash value or death benefit of their life insurance policy as collateral. By assigning the policy to the lender, the borrower can provide an additional layer of security while retaining ownership and control of the policy.

In this article, we will delve into the concept of collateral assignment of life insurance, understanding how it works, the reasons for using it, the benefits and drawbacks, as well as important considerations to keep in mind.

Additionally, we will compare collateral assignment with other forms of collateral and provide real-life examples to illustrate its practical application in various scenarios.

Before we proceed, it’s important to note that the details of collateral assignment can vary depending on the jurisdiction and terms of the insurance policy. It’s crucial for borrowers and policyholders to consult with their financial advisors and insurance providers to ensure they fully understand the implications and requirements of utilizing collateral assignment of life insurance.

Collateral assignment of life insurance refers to the process of using a life insurance policy as collateral for a loan or other financial obligation. When a borrower assigns their life insurance policy as collateral, they transfer a portion or all of their rights and benefits from the policy to the lender. This arrangement provides the lender with a form of security in case the borrower defaults on the loan.

Under a collateral assignment, the policyholder retains ownership of the policy and continues to pay the premiums. The assignee, typically the lender, receives the right to the policy’s cash value or death benefit as a means of recovering the outstanding debt in the event of default.

To create a collateral assignment, a written agreement known as a collateral assignment agreement is usually required. This agreement outlines the specifics of the assignment, including the amount of coverage assigned, the rights of the assignee, and the conditions for release of the collateral upon repayment of the loan.

It’s important to note that the collateral assignment of life insurance does not cancel or terminate the policy. The policy remains in force, and the beneficiary designation typically remains unchanged. In the event of the policyholder’s death, the death benefit is paid out as specified in the original policy contract.

It’s also worth mentioning that there are two types of collateral assignments for life insurance: outright assignment and conditional assignment. An outright assignment transfers all the policy rights and benefits to the assignee for the duration of the loan, while a conditional assignment only grants the assignee access to the policy’s value or death benefit if certain conditions, such as default on the loan, occur.

Now that we have a clear understanding of collateral assignment of life insurance, let’s explore how this process works in practice.

The process of collateral assignment of life insurance involves several steps and considerations. Here’s how it generally works:

• Evaluation of Loan Eligibility: The borrower applies for a loan and undergoes the usual evaluation process. The lender assesses the borrower’s creditworthiness, income, and other factors to determine loan eligibility.
• Identification of Collateral Options: If the lender requires collateral to secure the loan, the borrower explores different options. Life insurance policies with cash value or death benefits can be considered as potential collateral.
• Insurance Policy Examination: The borrower reviews their life insurance policy to determine the available cash value and death benefit. This information helps both the borrower and the lender assess the suitability of collateral assignment.
• Collateral Assignment Agreement: Once both parties agree to move forward with collateral assignment, a collateral assignment agreement is drafted. This agreement outlines the details of the assignment, including the amount of coverage assigned, the rights and obligations of the parties involved, and the conditions for release of the collateral.
• Notification to the Insurance Company: The borrower notifies their insurance company about the collateral assignment. The insurance company updates their records to reflect the assignee’s rights to the policy’s cash value or death benefit, as stipulated in the collateral assignment agreement.
• Ongoing Premium Payments: The borrower continues to pay the premiums on the life insurance policy to keep it active. Failure to do so could lead to policy termination and potentially affect the collateral assignment.
• Loan Repayment: The borrower is responsible for repaying the loan according to the terms and conditions set by the lender. If the borrower defaults on the loan, the lender has the right to access the assigned cash value or death benefit to recover the outstanding debt.
• Release of Collateral: Once the loan is fully repaid, the lender releases the collateral back to the borrower. At this point, the borrower regains full control and ownership of the life insurance policy.

It’s important to note that the process may vary slightly depending on the specific requirements of the lender and the insurance company. Additionally, the terms of the collateral assignment agreement will play a crucial role in determining the rights and obligations of both parties involved.

Now that we understand how collateral assignment works, let’s explore the reasons why individuals opt for this strategy.

Collateral assignment of life insurance can be a valuable tool for borrowers and lenders alike. Here are some reasons why individuals choose to use this strategy:

• Access to Financing: Collateral assignment allows individuals who may not have traditional forms of collateral, such as real estate or valuable assets, to access financing. By utilizing the cash value or death benefit of their life insurance policy, borrowers can secure loans for various purposes, such as business expansion, education expenses, or medical bills.
• Lower Interest Rates: Lenders may offer lower interest rates for loans secured by collateral. The added security provided by the life insurance policy reduces the lender’s risk exposure, resulting in more favorable terms for the borrower.
• Easier Loan Approval: Collateral assignment can make loan approval easier for borrowers with less-than-perfect credit or limited income. The presence of collateral can mitigate some of the perceived risks for lenders, increasing the chances of loan approval.
• Retention of Policy Ownership and Control: Unlike other forms of collateral, such as selling an asset outright, collateral assignment of life insurance allows borrowers to retain ownership and control over their policy. They can continue to name beneficiaries, make changes to the policy, and access the policy’s cash value as needed, as long as the loan obligations are being met.
• Preservation of Policy Benefits: Assigning collateral does not cancel the life insurance policy. The original policy benefits, such as death benefit payouts, remain intact for the beneficiaries. This ensures that loved ones are financially protected in case of the policyholder’s untimely passing.
• Flexibility and Versatility: Collateral assignment can be used with various types of life insurance policies, including both permanent (whole life, universal life) and term life insurance. This provides borrowers with the flexibility to choose a policy that aligns with their financial goals and needs.

It’s important for borrowers to carefully evaluate their financial situation and assess whether collateral assignment is the right option for their needs. Taking into account the benefits and drawbacks of collateral assignment, as well as comparing it with alternative forms of collateral, can help borrowers make informed decisions.

Next, let’s explore the advantages and disadvantages of collateral assignment of life insurance.

Collateral assignment of life insurance offers several benefits and drawbacks for borrowers and lenders. Understanding these advantages and disadvantages can help individuals make informed decisions about utilizing this strategy. Let’s explore them:

• Improved Loan Terms: By offering collateral in the form of a life insurance policy, borrowers can often secure loans with better interest rates and terms compared to unsecured loans.
• Access to Higher Loan Amounts: Collateral assignment can help borrowers access higher loan amounts based on the value of their life insurance policy. This can be particularly beneficial for larger expenses or investments.
• Retain Policy Ownership: Collateral assignment allows borrowers to retain ownership and control of their life insurance policy. They can continue to make changes to the policy and access its benefits, such as cash value, while meeting loan obligations.
• Preservation of Policy Benefits: The life insurance policy’s original benefits, such as death benefit payouts, remain intact for the beneficiaries. This ensures that loved ones are financially protected, even if the policy is assigned as collateral.
• Flexibility and Versatility: Collateral assignment can be used with different types of life insurance policies, providing borrowers with flexibility in choosing a policy that suits their needs and financial goals.
• Reduced Cash Value and Benefit: Assigning collateral may restrict access to the policy’s cash value and limit the death benefit available to the policyholder during the loan term.
• Policy Termination Risk: If the borrower fails to meet the loan obligations or defaults, the policy may be terminated, leading to loss of coverage and potential financial consequences.
• Potential Loan Default Consequences: In the event of loan default, the lender can access the assigned cash value or death benefit, potentially impacting the financial protection for the borrower’s beneficiaries.
• Complexity and Administrative Requirements: Collateral assignment involves paperwork and administrative tasks, including drafting and executing a collateral assignment agreement, notifying the insurance company, and ensuring ongoing premium payments.
• Limitations on Policy Modifications: Depending on the terms of the collateral assignment agreement, borrowers may have restrictions on making changes to the policy, such as reducing coverage or surrendering the policy.

It’s essential for borrowers to carefully consider these benefits and drawbacks in the context of their specific financial situation and goals. Consulting with financial advisors and insurance professionals can provide valuable guidance to make an informed decision.

Next, let’s compare collateral assignment of life insurance with other forms of collateral to better understand its advantages and limitations.

Collateral assignment of life insurance offers distinct advantages and considerations compared to other forms of collateral. Let’s compare it to some common forms of collateral:

Real Estate:

Real estate is a traditional form of collateral widely used in lending. While real estate offers the potential for long-term appreciation, it can be financially burdensome due to property taxes, maintenance costs, and market fluctuations. Moreover, using real estate as collateral may involve complex legal processes and lengthy evaluation periods. In contrast, collateral assignment of life insurance provides a quicker and more straightforward solution, especially for those without real estate assets.

Vehicles are another common form of collateral. While they are easily identifiable and possess monetary value, vehicles depreciate over time. Additionally, vehicles require ongoing maintenance and are subject to wear and tear. Unlike vehicles, a life insurance policy’s value is not dependent on physical assets, making it an attractive option for those who do not own valuable vehicles or wish to preserve their vehicle’s daily utility.

Securities:

Securities, such as stocks or bonds, can be used as collateral. However, they are subject to market volatility, and their value can fluctuate considerably. Additionally, using securities as collateral may require transferring ownership or creating a margin account, which can involve additional fees and restrictions. Collateral assignment of life insurance offers stability, as the policy’s cash value remains relatively secure, regardless of market conditions.

Savings Accounts:

Savings accounts or certificates of deposit (CDs) can be used as collateral, providing a low-risk option for lenders. However, tying up savings in collateral may limit accessibility to those funds and reduce financial flexibility. Collateral assignment of life insurance can offer an alternative solution, allowing borrowers to access funds while keeping their savings intact.

It’s important to note that the suitability of collateral assignment versus other forms of collateral may depend on an individual’s unique circumstances and preferences. Assessing the advantages, drawbacks, and requirements of different collateral options is crucial in determining the best choice for a particular situation.

Next, let’s explore some practical examples of collateral assignment of life insurance to illustrate its application in real-life scenarios.

Collateral assignment of life insurance can be used in various real-life situations to secure loans and meet financial obligations. Here are a few examples:

1. Small Business Loan: A small business owner requires capital to expand their operations. Instead of offering personal assets or seeking a business loan without collateral, they choose to assign the cash value of their life insurance policy as collateral. This allows them to access favorable loan terms and maintain ownership of their life insurance policy while growing their business.

2. Education Financing: A parent wants to fund their child’s college education but does not have sufficient savings or assets to provide as collateral. By assigning the death benefit of their life insurance policy as collateral, the parent can secure a loan to cover tuition and other educational expenses. This approach allows them to borrow at lower interest rates and preserve their other assets for future needs.

3. Medical Expenses: A borrower faces unexpected medical expenses that are not fully covered by insurance. They assign the cash value of their life insurance policy as collateral to secure a loan and cover the medical bills. This enables them to get the necessary treatment without depleting their savings or incurring high-interest debt.

4. Estate Planning: An individual wants to ensure their loved ones are adequately provided for in case of their untimely passing. They assign the death benefit of their life insurance policy as collateral to secure a loan and establish an estate plan. This allows them to create a tax-efficient strategy while providing immediate financial support to their beneficiaries.

5. Debt Consolidation: A borrower has multiple outstanding debts with high-interest rates. They decide to assign the cash value of their life insurance policy as collateral to secure a consolidation loan. This allows them to combine their debts into a single loan with more favorable terms, such as lower interest rates and manageable monthly payments.

These examples demonstrate the versatility and practicality of collateral assignment of life insurance in various financial scenarios. It provides a viable option for individuals and businesses to access funds, manage expenses, and meet financial goals while leveraging the financial protection provided by their life insurance policies.

Before pursuing collateral assignment, it’s crucial to thoroughly understand the terms and conditions of the loan and collateral assignment agreement. Seeking guidance from financial advisors and insurance professionals can help borrowers make informed decisions and ensure the best outcome for their specific circumstances.

In the next section, we will explore important considerations that individuals should keep in mind before using collateral assignment of life insurance.

Before deciding to use collateral assignment of life insurance, it is essential to consider the following factors:

Loan Terms and Repayment:

Thoroughly review the terms and conditions of the loan, including the interest rate, repayment period, and any associated fees. Determine if the loan terms align with your financial capabilities and goals. It’s crucial to have a clear understanding of the repayment schedule and ensure it is manageable within your budget.

Impact on Policy Benefits:

Understand how assigning collateral will affect your life insurance policy. Evaluate the potential impact on the policy’s cash value, death benefit, and other policy features. Determine if the reduction in benefits is acceptable in relation to the loan amount and the financial protection provided to your beneficiaries.

Insurance Policy Review:

Review your life insurance policy in detail to understand its provisions, restrictions, and rights. Familiarize yourself with the policy’s cash value accumulation, surrender charges, and any other contractual obligations. Ensure that the policy is eligible for collateral assignment and that you comply with all requirements set by the insurance company.

Risk of Policy Termination:

Be aware that failing to meet loan obligations can result in policy termination, potentially leaving you without coverage and potential financial consequences. Consider your ability to meet the loan payments and have a contingency plan in case of unforeseen circumstances to mitigate this risk.

Professional Guidance:

Seek advice from financial advisors and insurance professionals who can provide insight into the pros and cons of collateral assignment of life insurance. They can help you evaluate your specific needs, assess the impact on your financial situation, and explore alternative options that may better suit your circumstances.

Legal and Tax Implications:

Understand the legal and tax implications associated with collateral assignment based on your jurisdiction. Consult with legal and tax professionals to ensure compliance with applicable laws and regulations. Be aware of any potential tax consequences, such as potential taxable events or changes in the insurance policy’s tax status.

By carefully considering these factors, you can make an informed decision about whether collateral assignment of life insurance is the right strategy for your financial needs. It’s important to conduct thorough research, weigh the benefits and drawbacks, and consult with professionals to ensure you are making the best choice for your individual circumstances.

In the concluding section, we will summarize the key points and emphasize the significance of due diligence when utilizing collateral assignment of life insurance.

Collateral assignment of life insurance can be a valuable tool for borrowers and lenders seeking to secure loans and meet financial obligations. By leveraging the cash value or death benefit of a life insurance policy, individuals can access financing with favorable terms and retain ownership and control over their policy.

However, utilizing collateral assignment requires careful consideration and due diligence. It is essential to assess the benefits and drawbacks, compare it with alternative forms of collateral, and evaluate its impact on policy benefits and repayment obligations. Seeking guidance from financial advisors and insurance professionals is crucial to ensure informed decision-making and a thorough understanding of the process and implications.

Understanding the terms and conditions of the loan, the collateral assignment agreement, and the policy itself is paramount. Regular reviews of the insurance policy and ongoing premium payments are necessary to maintain coverage and prevent policy termination. Additionally, individuals should stay aware of legal, tax, and compliance requirements associated with collateral assignment based on their jurisdiction.

By responsibly utilizing collateral assignment, individuals can access financing for various purposes while protecting their loved ones through the preservation of policy benefits. This strategy offers flexibility and versatility, allowing borrowers to meet their financial goals without sacrificing ownership and control of their life insurance policies.

Ultimately, the decision to use collateral assignment of life insurance should align with individual financial goals and risk tolerance. With careful planning, proper guidance, and a thorough understanding of the process, collateral assignment can be a valuable tool in managing finances and achieving financial objectives.

It’s important to always consult with professionals and conduct thorough research before proceeding with collateral assignment of life insurance to ensure the best outcome for your specific circumstances.

How Is Collateral Assignment Used In A Life Insurance Contract?

How Is A Collateral Assignment Used In A Life Insurance Contract?

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What Is Collateral Assignment (of a Life Insurance Policy)?

Meredith Mangan is a senior editor for The Balance, focusing on insurance product reviews. She brings to the job 15 years of experience in finance, media, and financial markets. Prior to her editing career, Meredith was a licensed financial advisor and a licensed insurance agent in accident and health, variable, and life contracts. Meredith also spent five years as the managing editor for Money Crashers.

Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

Kilito Chan / Getty Images

If you assign your life insurance contract as collateral for a loan, you give the lender the right to collect from the policy’s cash value or death benefit in two circumstances. One is if you stop making payments; the other is if you die before the loan is repaid. Securing a loan with life insurance reduces the lender’s risk, which improves your chances of qualifying for the loan.

Before moving forward with a collateral assignment, learn how the process works, how it impacts your policy, and possible alternatives.

Collateral assignment is the practice of using a life insurance policy as collateral for a loan . Collateral is any asset that your lender can take if you default on the loan.

For example, you might apply for a $25,000 loan to start a business. But your lender is unwilling to approve the loan without sufficient collateral. If you have a permanent life insurance policy with a cash value of $40,000 and a death benefit of $300,000, you could use that life insurance policy to collateralize the loan. Via collateral assignment of your policy, you authorize the insurance company to give the lender the amount you owe if you’re unable to keep up with payments (or if you die before repaying the loan).

Lenders have two ways to collect under a collateral assignment arrangement:

• If you die, the lender gets a portion of the death benefit—up to your remaining loan balance.
• With permanent insurance policies, the lender can surrender your life insurance policy in order to access the cash value if you stop making payments.

Lenders are only entitled to the amount you owe, and are not generally named as beneficiaries on the policy. If your cash value or the death benefit exceeds your outstanding loan balance, the remaining money belongs to you or your beneficiaries.

Whenever lenders approve a loan, they can’t be certain that you’ll repay. Your credit history is an indicator, but sometimes lenders want additional security. Plus, surprises happen, and even those with the strongest credit profiles can die unexpectedly.

Assigning a life insurance policy as collateral gives lenders yet another way to secure their interests and can make approval easier for borrowers.

Types of Life Insurance Collateral

Life insurance falls into two broad categories: permanent insurance and term insurance . You can use both types of insurance for a collateral assignment, but lenders may prefer that you use permanent insurance.

• Permanent insurance : Permanent insurance, such as universal and whole life insurance, is lifelong insurance coverage that contains a cash value. If you default on the loan, lenders can surrender your policy and use that cash value to pay down the balance. If you die, the lender has a right to the death benefit, up to the amount you still owe.
• Term insurance : Term insurance provides a death benefit, but coverage is limited to a certain number of years (20 or 30, for example). Since there’s no cash value in these policies, they only protect your lender if you die before the debt is repaid. The duration of a term policy used as collateral needs to be at least as long as your loan term.

A Note on Annuities

You may also be able to use an annuity as collateral for a bank loan. The process is similar to using a life insurance policy, but there is one key difference to be aware of. Any amount assigned as collateral in an annuity is treated as a distribution for tax purposes. In other words, the amount assigned will be taxed as income up to the amount of any gain in the contract, and may be subject to an additional 10% tax if you’re under 59 ½.

A collateral assignment is similar to a lien on your home . Somebody else has a financial interest in your property, but you keep ownership of it.

The Process

To use life insurance as collateral, the lender must be willing to accept a collateral assignment. When that’s the case, the policy owner, or “assignor,” submits a form to the insurance company to establish the arrangement. That form includes information about the lender, or “assignee,” and details about the lender’s and borrower’s rights.

Policy owners generally have control over policies. They may cancel or surrender coverage, change beneficiaries, or assign the contract as collateral. But if the policy has an irrevocable beneficiary, that beneficiary will need to approve any collateral assignment.

State laws typically require you to notify the insurer that you intend to pledge your insurance policy as collateral, and you must do so in writing. In practice, most insurers have specific forms that detail the terms of your assignment.

Some lenders might require you to get a new policy to secure a loan, but others allow you to add a collateral assignment to an existing policy. After submitting your form, it can take 24 to 48 hours for the assignment to go into effect.

Lenders Get Paid First

If you die and the policy pays a death benefit , the lender receives the amount you owe first. Your beneficiaries get any remaining funds once the lender is paid. In other words, your lender takes priority over your beneficiaries when you use this strategy. Be sure to consider the impact on your beneficiaries before you complete a collateral assignment.

After you repay your loan, your lender does not have any right to your life insurance policy, and you can request that the lender release the assignment. Your life insurance company should have a form for that. However, if a lender pays premiums to keep your policy in force, the lender may add those premium payments (plus interest) to your total debt—and collect that extra money.

There may be several other ways for you to get approved for a loan—with or without life insurance:

• Surrender a policy : If you have a cash value life insurance policy that you no longer need, you could potentially surrender the policy and use the cash value. Doing so might prevent the need to borrow, or you might borrow substantially less. However, surrendering a policy ends your coverage, meaning your beneficiaries will not get a death benefit. Also, you’ll likely owe taxes on any gains.
• Borrow from your policy : You may be able to borrow against the cash value in your permanent life insurance policy to get the funds you need. This approach could eliminate the need to work with a traditional lender, and creditworthiness would not be an issue. But borrowing can be risky, as any unpaid loan balance reduces the amount your beneficiaries receive. Plus, over time, deductions for the cost of insurance and compounding loan interest may negate your cash value and the policy could lapse, so it’s critical to monitor.
• Consider other solutions : You may have other options unrelated to a life insurance policy. For example, you could use the equity in your home as collateral for a loan, but you could lose your home in foreclosure if you can’t make the payments. A co-signer could also help you qualify, although the co-signer takes a significant risk by guaranteeing your loan.

Key Takeaways

• Life insurance can help you get approved for a loan when you use a collateral assignment.
• If you die, your lender receives the amount you owe, and your beneficiaries get any remaining death benefit.
• With permanent insurance, your lender can cash out your policy to pay down your loan balance.
• An annuity can be used as collateral for a loan but may not be a good idea because of tax consequences.
• Other strategies can help you get approved without putting your life insurance coverage at risk.

NYSBA. " Life Insurance and Annuity Contracts Within and Without Tax Qualified Retirement Plans and Life Insurance Trusts ." Accessed April 12, 2021.

IRS. " Publication 575 (2020), Pension and Annuity Income ." Accessed April 12, 2021.

Practical Law. " Security Interests: Life Insurance Policies ." Accessed April 12, 2021.

Absolute Assignment

What does absolute assignment mean.

Absolute assignment refers to a policyholder transferring his or her ownership of a policy to another party. That transfer means that all of the coverage within that policy will now go to the newly named party. The original owner of the policy does not have to state his or her reasons for doing so nor does he or she need to stipulate any conditions for the transfer.

Insuranceopedia Explains Absolute Assignment

There are a number of reasons why a policyholder transfers all of their rights to a policy to another person or entity. They might think of it as a gift to someone else. It could be the sole means of paying off a loan. Even if the insured has now given up their rights to all of the claims and privileges, they are still responsible for payments for the policy. The new owner might have been asked by the original owner to pay the insurer after the transfer is completed, but if the newly named party fails to do so, the negligence will not be blamed on that person but on the original policyholder.

Related Definitions

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What Is a Life Insurance Assignment?

More articles.

•   1. What Is the Collateral Assignment of a Life Insurance Policy?
•   2. What Is the Assignment of Insurance Benefits?
•   3. Absolute Assignment of Life Insurance Policies

Although the basic element of a life insurance policy is financial security protection in the event of a premature death, the variety of products available in the marketplace provides you with many financial planning options. A life insurance assignment is a document that allows you to transfer the ownership rights of your policy to a third party, transferring to that third party all rights of ownership under your policy, including the rights to make decisions regarding coverage, beneficiary and investment options. The two kinds of life insurance assignments are conditional and absolute.

Conditional Assignment

With a conditional assignment, although you transfer your life insurance policy’s ownership rights to another party, the assignment stipulates that if a certain specified event occurs, the assignment can be suspended or revoked in whole or in part. The event in question cannot be something that you can cause to happen. If you assigned your life insurance policy to a business partner, for example, with the explicit agreement that on the death of that business partner the assignment is revoked, that assignment is deemed conditional.

Absolute Assignment

When you make an absolute assignment, the rights, title and interest in the life insurance policy pass on to another party without the possibility of reversal. The assignment provides security to the assignee in that you can no longer make decisions regarding the policy that would jeopardize it, such as taking out a policy loan or withdrawing cash values.

Secured Loan

If you own a business, and you wish to take out a loan for your business, the lender may require you to purchase life insurance on your own life as security for the loan. Initially you make the request for the insurance. Once the policy is approved and issued, you make an assignment to the bank. The bank now controls the decisions and can make changes to the policy, including naming itself as beneficiary.

Collateral Loan

If you own a life insurance policy with cash values, you might wish to access those cash values to increase your income flow. Withdrawals from life insurance policy cash values can result in taxes due and might reduce your death benefit. An alternative is to assign the life insurance policy to a lender in exchange for a line of credit or regular loan payments. These loans are generally not taxable, and you can typically borrow up to a stated maximum percentage of the cash value. Since the policy is assigned to the bank, your failure to pay the premiums on the policy will cause the bank to call the loan, cancel the insurance policy and use the cash values as payment of the loan. If you maintain the policy in force until your death, the bank is generally the beneficiary of the tax-free policy proceeds up to and including the outstanding amount of the loan, with any remaining policy proceeds paid tax free to your named beneficiary.

• AXA Life: Know Your Insurance

Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.

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What is the collateral assignment of a life insurance policy, what is the assignment of insurance benefits, absolute assignment of life insurance policies, is mortgage insurance better than life insurance to pay off a mortgage upon death, tapping the cash in life insurance, how does renewing a loan work, tax on withdrawal from life insurance, is life insurance taxed at payout, boat financing tips for consumers, how long can co-signers stay on a mortgage loan, cancelling whole life insurance, how much can i borrow against cash value.

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• Government & Policy

Assignee: What it is, How it Works, Types

Michelle P. Scott is a New York attorney with extensive experience in tax, corporate, financial, and nonprofit law, and public policy. As General Counsel, private practitioner, and Congressional counsel, she has advised financial institutions, businesses, charities, individuals, and public officials, and written and lectured extensively.

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

What Is an Assignee?

An assignee is a person, company, or entity who receives the transfer of property, title, or rights from another according to the terms of a contract. The assignee receives the transfer from the assignor. For example, an assignee may receive the title to a piece of real estate from an assignor.

Key Takeaways

• An assignee is a person, company, or entity who receives the transfer of property, title, or rights from a contract.
• The assignee receives the transfer from the assignor.
• An assignee may be the recipient of an assignment, a liability, or appointed to act in the stead of another person or entity.
• The assignee typically will hold the rights of power of attorney only for a specified time or for particular circumstances.
• Once the time has expired or the circumstances have been resolved, the assignee would automatically relinquish those rights.
• Not all assignment contracts are required to be made in writing, but they often are.

How an Assignee Works

An assignee may be the recipient of an assignment, a liability, or appointed to act in the stead of another person or entity. For example, an executor of an estate may be appointed through a will left by a decedent.

Types of Assignees

Assignee in real estate.

An assignee is the recipient of a title when a deed is signed to confer ownership of property in a transaction. A tenant might choose to transfer their property rights to an assignee who would assume duties for paying rent and tending to the property. There may be limits to the rights and liabilities that are granted to an assignee based on the nature of the transfer or assignment of rights.

For example, an assignee might take on the property rights from a tenant who vacated a rental property, but the tenant may still be liable if the assignee does not make rent payments on time. An assignee who takes title and ownership of real estate might not have certain rights to use the property any way they wish. There may be rights of ingress and egress that must be negotiated with adjacent property owners who hold surrounding land parcels. The assignee could receive certain rights that run with the land when they are granted the title.

Assignment by Power of Attorney

Power of attorney may be assigned to a person to tend to certain affairs for a person while they are out of the country or not capable of taking action for themselves. The assignment of power of attorney can grant broad rights or be limited in scope by the terms set by the assignor. The rights could be for the specific handling of a contract or business deal that the assignor cannot be present for.

The assignee typically will hold the rights of power of attorney only for a specified time or particular circumstances. Once the time has expired or the circumstances have been resolved, the assignee would automatically relinquish those rights. It is possible that the terms of power of attorney might allow an assignee to act in their self-interest rather than for the interests of the assignor.

Assignee in an Insurance Policy

In the context of a life insurance policy, interest in a policy can be transferred from the policyholder to a lender or relative by assignment of the policy. In this case, the policyholder is the assignor and the person in whose favor the policy has been assigned is called the assignee.

Assignee in a Contract

When one party to a contract—the assignor—hands off the contract's obligations and benefits to a different party—the assignee—this is known as an assignment of contract. In this situation, the assignee assumes all the rights and responsibilities of the contract from the assignor. All, or a portion, of a letter of credit can be assigned to a third party to pay vendors and suppliers.

Assignee in a Loan

An assignee is a person or a company that buys your loan. For example, an auto dealer that extends credit to individuals may sell their loans to a bank. In this case, the bank is the assignee and the auto dealer is the assignor. If your loan has been sold, you owe money to whoever owns your loan. In the event that responsible parties fail to meet their loan obligations, the assignee has a lien on the vehicle and can repossess it.

Not all assignment contracts are required to be made in writing, but they often are. Assignment contracts may also need to be notarized and witnessed in order to be valid. The assignment of property and collateral for loans must be in writing. Note that not all rights, contracts, or other property are assignable; many contracts, particularly real estate leases and personal service agreements, explicitly prohibit assignment. 

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