What Does Collateral Assignment Mean?
Collateral assignment is the transferring of an asset’s right of ownership from the borrower to the lender up until the loan gets fully paid. The transferred asset can be the borrower’s life insurance.
Insuranceopedia Explains Collateral Assignment
A borrower’s asset may be one of the requirements for taking out a loan. That asset should be of considerable value, like a house or a car. The borrower yields the ownership right to the lender, which gives the latter a sense of security to back the loan.
The borrower gets their right to the asset once again after the loan is fully paid. However, if the borrower is unable to pay the loan, the lender becomes the ultimate owner of the asset.
When insurance is used as the collateral assignment, the lender is assigned as the beneficiary and may remain as such if the borrower is unable to pay the loan, thereby receiving the benefits paid out by the policy.