assignment of insurance policy meaning

Assignment of insurance policies and claims | Practical Law

Assignment of insurance policies and claims

Practical law uk practice note w-031-6021 (approx. 19 pages).

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Assignment is a transfer of legal rights under or interest in an insurance policy to another party.

Additional Information

In most instances, the assignment of such rights can only be effected with the written consent of the insurer.

Main content

What is an assignment of benefits agreement?

How does assignment of benefits work.

Assignment of benefits example

Assignment of benefits for homeowners

Assignment of benefits in healthcare, pros and cons of an aob agreement, canceling an aob agreement, the bottom line, an assignment of benefits contract lets someone else bill an insurance provider on your behalf.

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When you obtain insurance, whether for your health or your home , you're probably thinking about what the coverage will pay for, not how the payments will be made.

Policyholders who sign an assignment of benefits agreement allow their insurance benefits to go directly to the service provider. Usually, this eliminates the headache of dealing with an insurance company's claims department. But it can also open you up to potential fraud.

An assignment of benefits (AOB) agreement is a contract that a policyholder signs to allow a third party to receive their insurance benefits.

"An assignment of benefits is designating who's going to receive the payment that the insurance company issues after a claim is received," explains Lauren Winans, chief executive officer and principal HR consultant at Next Level Benefits , an HR consulting firm that helps companies navigate employee benefits including insurance.

Without an AOB agreement in place, the policyholder would pay the other party out of their own pocket, then file a claim with their insurance company to get reimbursed.

For example, if you go to a doctor, you might sign an AOB agreement so that their billing department can deal with the insurance provider directly. Ideally, that would prevent you from having to get involved with the claims department at your insurance company.

That said, there can still be circumstances where you have to get involved, even with an assignment of benefits agreement — for example, if you owe the difference between what your doctor charges and what the insurer pays.

These AOB agreements can vary depending on factors like the type of insurance policy, the provider, and state laws. In some cases, an AOB happens automatically. If you go to an in-network doctor, they're under contract with that insurance company. That contract states that the provider will handle billing and receive payment directly from the insurance company, Winans says. But with out-of-network providers you might sign an AOB agreement as part of standard check-in paperwork. That way the doctor can still receive at least some payment directly from the insurance company, and then bill you for the remainder.

The exact terms of an AOB agreement vary based on who's asking you to sign. Some agreements might be specific to one type of repair or project, whereas others might cover several. Some agreements go beyond an assignment of benefits and give the contractor full power of attorney rights, says Angel Conlin, chief insurance officer at Kin Insurance , a home insurance provider. Insurers can also differ in how they handle these agreements. A 2019 Florida law, for example, enables insurers to offer policies that restrict the right to use an assignment of benefits agreement, as long as the policy is offered at a discount. Conlin says Kin Insurance policyholders who waive their assignment of benefits right save an average of 5% on their policy. "The good news is they get a discount for giving up a right they probably never knew they had and never really want to use," she says.

For homeowners' insurance, an AOB agreement could be used if a contractor wants to get paid directly from the insurer. In many cases, says Conlin, that happens in a high-pressure situation.

"You discover that there's a water leak and your house is flooding. So you quickly call the fastest place you can find," she says. "Then you're standing there with some papers on a clipboard in front of you to sign so they can start sucking the water out. Oftentimes, there's an assignment of benefits included in there."

In healthcare, an AOB agreement might be used to pay a medical professional that you don't necessarily choose, like an anesthesiologist, Winans says. You may have chosen a surgeon, but the anesthesiologist that gets assigned to you the day of the surgery might bill separately. So, you might be asked to sign an assignment of benefits when you check in. "You're essentially signing that anyone who sees me today can accept payment directly from the insurance company, it doesn't have to go through me as the patient," Winans adds.

An AOB agreement can make the claims and payment processes easier at times, but there are also some downsides to note. Much depends on the situation, so consider factors like what your insurer allows and what the service provider is specifically asking for.

Here are some general pros and cons to consider:

Even though an AOB agreement can streamline the claims and payment processes, there can be downsides that come with transferring benefits to another party, particularly with property insurance. "Because they now stand in the shoes of the insured, they can do everything without asking the insured's permission," Conlin says. For example, a vendor could inflate a claim and commit fraud, she says, causing the claim to get denied and leaving the homeowner unable to get their home repaired. Or, the vendor could sue the insurance company on your behalf for payment on an inflated claim. "So then the insured doesn't have any idea that all of a sudden they have a lawsuit on their record," Conlin adds.

In Florida, these types of lawsuits became an issue due to a state law that helped contractors get attorney's fees paid for by the insurance company. That incentivized some attorneys to work with contractors to obtain AOB agreements and then sue insurers. "That way, the vendor gets to inflate the amount they're demanding, and the attorney gets attorney's fees. So it was this sort of symbiotic partnership between them," Conlin says. A 2022 Florida law removed this allowance, but contractors are trying to fight it in court .

Depending on the circumstances, including laws where you live, policyholders might have some flexibility to cancel an assignment of benefits agreement. For example, in Florida, homeowners have at least 14 days to back out of an agreement without any penalties.

Once the grace period passes, there isn't much recourse. For example, a vendor might file a lawsuit long after the period passes where you can rescind the agreement. In that case, the assignment of benefits agreement stands.

An AOB agreement can make it easy for you to receive insurance benefits without dealing with the claims department at your insurance company. But not all agreements look the same, so read carefully before signing. In some cases, like healthcare, the agreement could work well for all parties. But in other cases, such as home repairs, it might be benefitting the vendor more than the policyholder. If you're unsure about what an assignment of benefits agreement means for you, consider talking to a professional. Your insurer should be able to explain what's allowed in your situation, and external experts, like an attorney, might help you make a more informed decision.

What is an assignment of benefits?

Three people in an office talking over a pile of papers.

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:

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:

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.

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.

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.

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Assignment in Insurance Policy | Meaning | Explanation | Types

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 in Insurance Policy – Meaning, Explanation, Types

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:

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 Assignee on a Life Insurance Policy?

When people take out a life insurance policy, it’s typically a step taken to prepare your loved ones for life after you pass away. What you may not know is that insurance policies are owned entities, which means they can be used as collateral for a loan or even be sold to offer money to you when you’re in a tough spot. There are also different methods available to do this, which we’ll explain in this article.

An individual who is taking out insurance will have many choices, such as whether you prefer to purchase whole life insurance or term life insurance . You also have choices when it comes to using your policy to leverage money that has already been invested in it.

Part of that is understanding the difference between a collateral assignment and an absolute assignment, so you can be sure to choose the solution that works best with your financial needs. The other part of it involves knowing the most important terms related to an assignment so that you go in with the knowledge you need.

Collateral Assignment of Life Insurance

If you have ever taken out a standard personal loan, a collateral assignment of life insurance has a lot of similarities to that process. The collateral for the loan is the life insurance policy and an organization or individual who pays out the loan is the assignee . They are also the ones who take over the policy on a conditional basis.

One important thing to know is that the assignee cannot resell the policy, make use of its cash value, or make changes to it. The assignee may only take the money for the death benefit if you, as the policyholder, default on the loan.

In the typical situation, if the collateral assignment is standing at your death, the assignee will let the insurance company know about the debt remaining, including interest. They will then be provided with that amount. If there are extra benefits, those will go to your beneficiary listed in the policy.

Absolute Assignment of Life Insurance

Another way to acquire a loan using life insurance is through an absolute assignment. This differs from collateral assignment since instead of using the loan as collateral, you are signing the full policy over to a person or entity. This person or business is considered the assignee, while the person who is selling the policy is the assignor.

The individual who buys the insurance policy gains ownership of the policy. This makes them responsible for the premiums and lets them make changes or choose different beneficiaries .

Each absolute assignment will have different terms based on the contract that is signed. For instance, it might explain that the assignor is transferring all title, rights, and interest in the policy to the assignee. Depending on the insurance company, an ownership clause may be used to make the transfer itself.

Understanding Policy Provisions

To ensure the assignee is protected, the insurance company needs to be notified that an assignment is in place. If the company doesn’t have notice of the assignment, the process might be paid to a beneficiary or a different assignee. This can be an issue since the insurance company will not pay the amount out again to another person.

Many life insurance policies come with policy provisions related to assignments. The most common include:

Because of these provisions, it’s crucial to ensure that you make the assignment correctly. This applies whether it is an absolute assignment or a collateral assignment. The best thing you can do to avoid problems is to speak with an experienced insurance professional who can guide you to the best solution for your needs.

Comparing Assignments Among Life Insurance Policies

If you are in a situation where you need money and it needs to happen quickly, ask yourself whether your cash value in your life insurance policy could help you out. After you decide the answer to that, make sure that you consider the larger picture.

Going with an absolute assignment approach may be able to offer you a large sum of money at one time. However, you also need to realize that your family and loved ones will no longer have the protection that was provided by the policy. If this is a policy that you have been dutifully paying into for decades, losing all the value is something you need to decide whether you’re ready for.

On the other hand, a collateral assignment doesn’t whisk away the policy in its entirety. You can get control of your policy back as soon as you resolve your financial problem and pay back the loan. A collateral assignment is one of the most common ways to borrow from a life insurance policy to use the cash value on necessities.

Collateral assignments let you regain the benefits associated with a long-term life insurance policy at some point in the future. Since most people are familiar with paying off student loans, auto loans, and mortgages, this agreement is similar. Making all of the payments on time can help with both financial concerns in the present as well as creating long-term financial success.

Selecting Between Life Insurance Assignment Options

Every person is unique and will be in a different situation when considering a life insurance assignment. For one person, choosing a collateral assignment might be the right choice since the individual wants the life insurance benefits back after paying off the loan. Someone else may not be interested in those benefits and need a larger amount of money, which an absolute assignment can offer.

You’ll want to consider all your options before borrowing through your life insurance , whether that involves an assignment or another type of loan. Be aware of all of your options and make sure your choice is right for the present and your future financial situation.

Assignment of Life Insurance Policy

on August 10, 2016

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What is an insurance assignment?

Assignment — a transfer of legal rights under, or interest in, an insurance policy to another party . In most instances, the assignment of such rights can only be effected with the written consent of the insurer.

How does assignment of insurance work?

What are the two types of assignments in insurance.

What does assignment mean on a life insurance policy?

A life insurance policy can be assigned when rights of one person are transferred to another . The rights to your insurance policy can be transferred to someone else for various reasons. The process is known as assignment. An “assignor” (policyholder) is the person who assigns the insurance policy.

What is an insurance assignment form?

This form permanently transfers ownership of your FEGLI insurance to another individual, trustee, or corporation (however, premiums continue to be withheld from your salary/annuity). An assignment is irrevocable, and cannot be changed later.

What Is Assignment of Insurance? : Insurance Questions Answered

Why would you assign a life insurance policy?

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.

What does it mean to accept assignment of benefits?

“Assignment of Benefits” is a legally binding agreement between you and your Insurance Company, asking them to send your reimbursement checks directly to your doctor. When our office accepts an assignment of benefits, this means that we have to wait for up to one month for your insurance reimbursement to arrive .

What does policy assigned mean?

assign a policy in Insurance If you assign a policy, you transfer legal ownership of an insurance policy to another person . The policy may be assigned to someone else by written request of the current owner.

What is the procedure for assignment in life policy?

Assignment of a life insurance policy may be made by making an endorsement to that effect in the policy document (or) by executing a separate 'Assignment Deed' . In case of assignment deed, stamp duty has to be paid. An Assignment should be signed by the assignor and attested by at least one witness.

What's the difference between nomination and assignment?

Nomination and Assignment serve different purposes. The nomination protects the interests of the insured as well as an insurer in offering claim benefits under the life insurance policy. On the other hand, assignment protects the interests of an assignee in availing the monetary benefits under the policy.

What you mean by assignment?

Definition of assignment 1 : the act of assigning something the assignment of a task. 2a : a position, post, or office to which one is assigned Her assignment was to the embassy in India. b : a specified task or amount of work assigned or undertaken as if assigned by authority a homework assignment.

What are the types of assignment?

Can an insurance policy be assigned or transferred?

In insurance also when rights and obligation under the contract are transferred from one to another, the same is called assignment of the policy . There can be another assignment in insurance which is assignment of benefits under the policies. Assignment of policy and assignment of benefits are quite distinct.

Why is assignment of benefits not recommended?

Loopholes in the way AOB is being used are enabling contractors and restoration companies to abuse the practice by inflating claims costs and charging insurance companies for work that was either unnecessary or simply wasn't done at all. These fraudsters then keep any extra money for themselves.

What is the purpose of assignment of benefits?

Assignment of benefits is a legal contract between you and a third party, such as a roofer, contractor, or other vendors. The AOB allows you to transfer specific rights that your insurance policy grants you to a third party .

Can insurance proceeds be assigned?

Most business insurance policies contain a so-called anti-assignment clause . This clause prohibits policyholders from transferring any of their rights under the policy to someone else. This means that the insured business cannot cede its right to collect claim payments to another party.

What is the effect of assignment to the policy owner?

The Assignee has control of the insurance policy as if the Assignee is the Policy Owner. There is no change to the life assured in the policy and the policy remains unaltered .

What do you mean by assignment and transfer of policies?

--(1) A transfer or assignment of a policy of insurance, wholly or in part, whether with or without consideration, may be made only by an endorsement upon the policy itself or by a separate instrument, signed in either case by the transferor or by the assignor or his duly authorised agent and attested by at least one ...

What is conditional assignment in insurance?

Conditional Assignment means that the Transfer of Rights will happen from the Assignor to the Assignee subject to certain terms and conditions . If the conditions are fulfilled then only the Policy will get transferred from the Assignor to the Assignee.

Which of the following are two kinds of assignments?

What does benefit assigned mean?

Assignment of benefit When a patient assigns their right to the benefit to the servicing provider as full payment for those services .

What is the difference between assignment of benefits and accept assignment?

To accept assignment means that the provider agrees to accept what the insurance company allows or approves as payment in full for the claim. Assignment of benefits means the patient and/or insured authorizes the payer to reimburse the provider directly.

What does it mean to not accept assignment?

A: If your doctor doesn't “accept assignment,” (ie, is a non-participating provider) it means he or she might see Medicare patients and accept Medicare reimbursement as partial payment, but wants to be paid more than the amount that Medicare is willing to pay .

How many types of insurance assignments are there?

There are two types of assignment : Conditional assignment: This is done when the insured wishes to pass benefits of the policy to a relative in case of early death or certain conditions. The rights of the policyholder are restored once the conditions are fulfilled.

What are the consequences of an absolute assignment?

If an absolute assignment was made, the company will pay the entire proceeds to the assignee . If a collateral assignment was made, the company will usually make the check payable jointly to the assignee and the beneficiary.

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What is ‘Assignment’ of Life Insurance Policy?

Last updated: August 13, 2019 | by Sreekanth Reddy

Insurance is a contract between the insurance company (insurer) and you (policyholder) . It is a contract with full of jargon. As much as possible, we must try to understand all the insurance terms mentioned in the policy bond (certificate) . One such insurance jargon which is mostly used is Assignment .

If you are planning to apply for a home loan, your home loan provider may surely use this term. So, what is Assignment? Why assignment of a life insurance policy is required? What are different types of assignment? What are the differences between Assignment & Nomination?

What is Assignment?

Assignment of a life insurance policy means transfer of rights from one person to another. You can transfer the rights on your insurance policy to another person / entity for various reasons. This process is referred to as ‘ Assignment ’.

The person who assigns the insurance policy is called the Assignor (policyholder) and the one to whom the policy has been assigned, i.e. the person to whom the policy rights have been transferred is called the Assignee .

Once the rights have been transferred from the Assignor to the Assignee, the rights of the policyholder stands cancelled and the assignee becomes the owner of the insurance policy.

Assigning one’s life insurance policy to a bank is fairly common. In this case, the bank becomes the policy owner whereas the original policyholder continues to be the life assured on whose death the bank or the policy owner is entitled to receive the insurance money.

Types of Assignment

The assignment of an insurance policy can be made in two ways;

Conditional assignment life insurance pic

In case if the death benefit received by the banker is more than the outstanding loan amount, the insurer will pay the bank the outstanding dues and pay the balance to the nominee directly. The balance amount (if any) will be paid to Mallya’s beneficiaries ( legal heirs / nominee) .

How to assign a life insurance policy?

The Assignment must be in writing and a notice to that effect must be given to the insurer. Assignment of a life insurance policy may be made by making an endorsement to that effect in the policy document (or) by executing a separate ‘ Assignment Deed ’. In case of assignment deed, stamp duty has to be paid. An Assignment should be signed by the assignor and attested by at least one witness.

Download absolute assignment deed sample format / conditional assignment deed format.

application for assignment life insurance policy pic

Nomination Vs Assignment

Nomination is a right given to the policyholder to appoint a person(s) to receive the death benefit (death claim) . The person in whose favor the nomination is effected is termed as ‘nominee’. The nominee comes into picture only after the death of the life assured (policy holder) . The nominee will not have the absolute right over the money (claim proceeds) . The other legal heirs of the policy holder can also recover money from the nominee.

(However, as per Insurance Laws (Amendment) Act, 2015 – If an immediate family member such as spouse / parent / child is made as the nominee, then the death benefit will be paid to that person and other legal heirs will not have a claim on the money)

Under nomination, the rights of the policyholder are not transferred. But, assignment is transfer of rights, interest and title of the policy to some other person (or) entity. To make assignment, consent of the insurer is also required.

Important Points

Hope you find this post informative and do share your comments.

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Sreekanth Reddy:

Sreekanth is the Man behind ReLakhs.com. He is an Independent Certified Financial Planner (CFP), engaged in blogging & property consultancy for the last 12 years through his firm ReLakhs Financial Services . He is not associated with any Financial product / service provider. The main aim of his blog is to "help investors take informed financial decisions." "Please note that the views given in this Blog/Comments Section/Forum are clarifications meant for reference and guidance of the readers to explore further on the topics/queries raised and take informed decisions. These should not be construed as investment advice or legal opinion."

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Very useful and gathered more knowledge

Hi, I got a question in CFP EXAM 5( case study paper) with regard to assignment of money back policy to a minor. I would like to know can a conditional assignment be made to a minor and if yes what about the premium that is yet to be paid? and would a guardian need to be appointed till the minor attains majority? and is it possible that an absolute assignment can be made?

Dear Dhaarini,

Where an assignment is made in favour of minor, the policy can not be dealt with during the minority of the assignee, even with consent of natural guardian or appointed guardian. This means minor assignee cannot raise loan, surrender or further assign the policy during his/her minority.

If the assignment is in favour of a minor, in the event of claim, policy money cannot be paid to him, as he cannot give valid discharge. It is therefore desirable that where the assignee is minor, testamentary guardian should be appointed in respect of all the properties of such minor including the policy moneys. The father i.e. natural guardian of the minor can only appoint the testamentary guardian. The appointment can be done by a separate instrument or on the back of the policy.

What if a wife has taken a policy in the name of his husband and put the nominee herself and also pays all the premiums herself, and now they are taking divorce. So, now can husband assign the policy to her and what benefits she can receive after assignment. Can she withdraw tha amount of the policy??

Dear Monika, Yes, he can make an Absolute assignment in the name of Wife..

A assigned his policy to his brother B and B is paying premiums. A’s nominee is his father. What will happen if B dies?

Dear Mr Naidu, May I know what type of Assignment is this??

A assigned his policy to his brother B, out of love and affection as absolute assignment. Whose life is covered?. What happens if B dies?

Dear Mr Naidu, If the assignee (Mr B) dies, then his/her legal heirs will be entitled to the policy money. Kindly note that an assignee cannot make a nomination on the policy which is assigned to him.

“Absolute assignment is generally made for valuable consideration e.g. raising of loan from an individual / institution. This assignment 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 even transfer his interest to another person or surrender the policy. Under absolute assignment when the assignee (Mr B) dies the benefits go to the legal heirs of the assignee and not to the heirs of the life assured.”

What is the procedure to get the policy assigned? How much time does it take?

Thanks for this. I always like to use study materials by Indians in preparing for my professional exams. The contents here are superb and easy to understand.

Once assignment is done, on whose name Renewal receipts and PPC will be generated.

Dear Gayu ..in the name of Policyholder only.

My colleagues were looking for USPS PS 1000 this month and were informed of an online platform that hosts a ton of fillable forms . If people are wanting USPS PS 1000 too , here’s https://goo.gl/Qqo6in .

Dear Sreekanth, I am having an LIC policy for the past 10 year. now i would like to assign the same to my mother. Now after the assignment, whose life is covered and who gets all the benefit? Do i have to appoint a new nominee after the assignment?

Dear Bhavik ..Life cover will be in your name only. Your mother can get the benefits. You can make her as the nominee.

If policy assigned to absolute assignment from A to B. B is the assignee of the policy and he have all rights of the policy. After assignment who will have a life cover A or B. Who will get the death benefits

Dear Senthil, Life cover – A. Beneficiary – B.

Thanks for this information, Let me know who will pay the remaining premium after assignment.and what are the other reasons for assignment except loan and gift. Manish

Dear Manish ..The policy holder only has to pay the premium.

I have a ULIP assigned to my home loan. I have paid two annual premiums till now. If I dont pay the next premium, will it have any impact on my home loan ? I know that my ulip will get discontinued in this case but can the bank force me to pay the premium legally ?

Dear Kalis, If sum assured falls below the outstanding loan amount then you banker may ask you to assign another policy or pay the premiums on this one.

Thanks. Sum assured is already below the loan amount. In this case, can bank take any legal action against me if I don’t pay the premium?

Dear Kalis..Why do you want to take this risk?

Who will have to pay tax if single premium ULIP where premium is >20% of sum assured is assgned to spouse & she then sureender it.

Dear Vishal ..The insured (policyholder)..

my father aged 72 has taken a ULIP policy on my Child with coverage 10 lakhs .But now he would like to Assign the policy to my mother’s Name aged 67.

Please Clarify weather the life coverage and policy benefits will be transferred to my Mother or will it continue with my son.

Dear Nisha, May I know who is the ‘insured’ in this policy? Is the child just a nominee to the policy? “If he assigns the policy for other purpose other than taking a loan, the nomination stands cancelled. If the policy is assigned, then the assignee will receive the policy benefit. “

Hi.. Really nice blog.very informative and useful. I liked the way You explained very briefly about Assignment’ of Life Insurance Policy.

Hi Srikanth,

Nice article on Assignment!

I Just wanted to know If i nominate my spouse for the life insurance or nominate my child and appoint my spouse how these to things are different in terms claim settlement of life insurance.

Ideally I may want my spouse to look-after my child education until they turn major and they do not misuse the claim amount.

Please let me know if possible your contact number so that we discuss further..

Please suggest.

Thanks, Shravan

Dear Shravan, If you are planning to buy a new Term plan, you can assign the policy under MWP Act by mentioning the Percentages (share in death benefits) among your legal heirs (spouse & kids). You also have the option to write a WILL and give detailed instructions about how the claim amount (if any, on such policy) should be used or allocated.

Dear Sreekant, Thanks for such valuable information. Please do correction on your post that the existing life insurance policies cannot be assigned under MWP Act. Pl correct me if I am wrong. Please let me know that even if I assign the policy unconditionally to the bank for home loan purpose, after repaying the home loan successfully, the bank should re-assign the policy to me. If it does not do this, what options do I have? Thanks again.

Dear Vivek, Yes, only new insurance policies can be assigned (while purchasing new ones) under MWP. I should have written the sentence as ‘You can also assign a new life insurance policy under….’ Thank you for pointing this out. (I have provided all the details about MWP act in another article).

If a policy is assigned with absolute assignment, it cannot be cancelled. It can be done only by another valid re-assignment. So, the banker has to re-assign it after the repayment of loan. When you do not wish to give away your complete control over policy, do not go in for absolute assignment.

thanks for prompt response.

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Life Insurance

Definitions

What Is a Collateral Assignment of Life Insurance?

Investopedia contributors come from a range of backgrounds, and over 24 years there have been thousands of expert writers and editors who have contributed.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

A collateral assignment of life insurance is a conditional assignment appointing a lender as an assignee of a policy. Essentially, the lender has a claim to some or all of the death benefit until the loan is repaid. The death benefit is used as collateral for a loan.

The advantage to using a collateral assignee over naming the lender as a beneficiary is that you can specify that the lender is only entitled to a certain amount, namely the amount of the outstanding loan. That would allow your beneficiaries still be entitled to any remaining death benefit.

Lenders commonly require that life insurance serve as collateral for a business loan to guarantee repayment if the borrower dies or defaults. They may even require you to get a life insurance policy to be approved for a business loan.

Key Takeaways

How a Collateral Assignment of Life Insurance Works

Collateral assignments make sure the lender gets paid only what they are due. The borrower must be the owner of the policy, but they do not have to be the insured person. And the policy must remain current for the life of the loan, with the policy owner continuing to pay all premiums . You can use either term or whole life insurance policy as collateral, but the death benefit must meet the lender's terms.

A permanent life insurance policy with a cash value allows the lender access to the cash value to use as loan payment if the borrower defaults. Many lenders don't accept term life insurance policies as collateral because they do not accumulate cash value.

Alternately, the policy owner's access to the cash value is restricted to protect the collateral. If the loan is repaid before the borrower's death, the assignment is removed, and the lender is no longer the beneficiary of the death benefit.

Insurance companies must be notified of the collateral assignment of a policy. However, other than their obligation to meet the terms of the contract, they are not involved in the agreement.

Example of Collateral Assignment of Life Insurance

For example, say you have a business plan for a floral shop and need a $50,000 loan to get started. When you apply for the loan, the bank says you must have collateral in the form of a life insurance policy to back it up. You have a whole life insurance policy with a cash value of $65,000 and a death benefit of $300,000, which the bank accepts as collateral.

So, you then designate the bank as the policy's assignee until you repay the $50,000 loan. That way, the bank can ensure it will be repaid the funds it lent you, even if you died. In this case, because the cash value and death benefit is more than what you owe the lender, your beneficiaries would still inherit money.

Alternatives to Collateral Assignment of Life Insurance

Using a collateral assignment to secure a business loan can help you access the funds you need to start or grow your business. However, you would be at risk of losing your life insurance policy if you defaulted on the loan, meaning your beneficiaries may not receive the money you'd planned for them to inherit.

Consult with a financial advisor to discuss whether a collateral assignment or one of these alternatives may be most appropriate for your financial situation.

Life insurance loan (policy loan) : If you already have a life insurance policy with a cash value, you can likely borrow against it. Policy loans are not taxed and have less stringent requirements such as no credit or income checks. However, this option would not work if you do not already have a permanent life insurance policy because the cash value component takes time to build.

Surrendering your policy : You can also surrender your policy to access any cash value you've built up. However, your beneficiaries would no longer receive a death benefit.

Other loan types : Finally, you can apply for other loans, such as a personal loan, that do not require life insurance as collateral. You could use loans that rely on other types of collateral, such as a home equity loan that uses your home equity.

What Are the Benefits of Collateral Assignment of Life Insurance?

A collateral assignment of a life insurance policy may be required if you need a business loan. Lenders typically require life insurance as collateral for business loans because they guarantee repayment if the borrower dies. A policy with cash value can guarantee repayment if the borrower defaults.

What Kind of Life Insurance Can Be Used for Collateral?

You can typically use any type of life insurance policy as collateral for a business loan, depending on the lender's requirements. A permanent life insurance policy with a cash value allows the lender a source of funds to use if the borrower defaults. Some lenders may not accept term life insurance policies, which have no cash value. The lender will typically require the death benefit be a certain amount, depending on your loan size.

Is Collateral Assignment of Life Insurance Irrevocable?

A collateral assignment of life insurance is irrevocable. So, the policyholder may not use the cash value of a life insurance policy dedicated toward collateral for a loan until that loan has been repaid.

What is the Difference Between an Assignment and a Collateral Assignment?

With an absolute assignment , the entire ownership of the policy would be transferred to the assignee, or the lender. Then, the lender would be entitled to the full death benefit. With a collateral assignment, the lender is only entitled to the balance of the outstanding loan.

The Bottom Line

If you are applying for life insurance to secure your own business loan, remember you do not need to make the lender the beneficiary. Instead you can use a collateral assignment. Consult a financial advisor or insurance broker who can walk you through the process and explain its pros and cons as they apply to your situation.

Progressive. " Collateral Assignment of Life Insurance ."

Fidelity Life. " What Is a Collateral Assignment of a Life Insurance Policy? "

Kansas Legislative Research Department. " Collateral Assignment of Life Insurance Proceeds ."

Policy Types

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What is collateral assignment of life insurance?

Collateral assignment lets you use your life insurance as loan collateral. When you die, your death benefit is paid to your lender first and any remaining funds go to your beneficiaries.

Updated November 3, 2021 | 3 min read

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When you apply for a loan, particularly a small business loan or Small Business Administration (SBA) loan, you can use your life insurance coverage as collateral. This is called collateral assignment, and it ensures that your lender will be paid any outstanding loan amount if you don’t have a good credit rating or other collateral.

Collateral assignment is different from naming the bank as the sole beneficiary of your policy, like with credit life insurance . Instead, collateral assignment ensures that if you die before repaying your loan, the insurance company will use your death benefit to settle up. After that, any remaining funds go to your named beneficiaries.

If you already have a policy with a death benefit greater than your loan amount, you may be able to collaterally assign that policy. However, some lenders may require you to buy a new policy specifically for collateral assignment. If you don’t have a life insurance policy or need additional coverage, you will need to apply for a separate policy. Once you have a policy in place, you can request collateral assignment paperwork from your insurer.

Key takeaways

Collateral assignment makes your life insurance death benefit collateral for a loan

If you die before repaying your debt, your insurer pays back what you owe to the lender before disbursing funds to your beneficiaries

You complete collateral assignment forms after your policy is active

The agreement ends only after you’ve satisfied the terms of your loan

How collateral assignment works

Applying for life insurance for collateral assignment is the same as applying for a personal life insurance policy — you need to have an active personal policy before you can assign it as collateral. You’ll go through the application review and underwriting process , and wait to receive your offer.

→ Learn more about how to buy life insurance

Who to name as your beneficiary

When buying life insurance for the purpose of collateral assignment, you name the beneficiaries as you would for a personal policy. So, if your personal policy would list your spouse, you list your spouse. The lender is not your beneficiary; they are the assignee on the collateral assignment paperwork after your policy is active. On the form, you are the assignor .

When you fill out a collateral assignment form, that assignment supersedes your beneficiaries’ rights to the death benefit. If you die, the life insurance company pays the lender, or assignee, the loan balance. The remainder of your death benefit — if there is one — goes to your beneficiaries.

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Who owns the life insurance policy

You are the policy owner and responsible for the premium payments. Some lenders may require an escrow account for the life insurance premiums, others may require proof of payment or prepayment. If you use a whole life policy for collateral assignment, the lender has access to the cash value of the policy if you default on the loan.

When to fill out collateral assignment paperwork

After you pay your first premium, sign your policy papers, and the insurer confirms that your policy is active, then you can ask for a collateral assignment form from the life insurance company or your insurance broker.

You’ll need your loan officer’s name and number for the form, as well as your policy number, Social Security number, and other personal information.

When collateral assignment ends

Collateral assignment ends only if you pay off your loan before you pass away. Your lender must agree that the terms of your loan have been met and send a release to your insurer in order to terminate the agreement.

If your policy lapses or you choose to cancel it, the lender could consider that a violation of your loan contract. They may even pay your premiums on your behalf to prevent a policy lapse. In that scenario, the lender adds the cost of any premiums they paid for your policy to your loan total.

Alternatives to collateral assignment

If your lender doesn’t require a collateral assignment agreement but you want to leverage your life insurance for debt repayment, there are a few other options.

Life insurance loan: A life insurance loan allows you to borrow directly from your permanent policy’s cash value. You need to accumulate enough cash value to cover a loan, which can take several years. Any unpaid amount, plus interest, is deducted from your death benefit.

Cash surrender: You can give up your permanent policy and take its cash surrender value , the amount of cash built up in the policy minus administrative fees. This option involves canceling your policy, so you’ll need to find replacement coverage and could face penalties if you cancel during your policy’s surrender period.

Term life insurance: You should always buy enough insurance to account for your debts . On average, term life is five to 15 times cheaper than whole life, and your beneficiaries can use the death benefit to pay off your debts and keep the remainder, sidestepping collateral assignment paperwork or lender involvement.

For most people, the most affordable and straightforward option is using your term life insurance policy’s death benefit to account for any outstanding loans when you die, with or without a collateral assignment attached. If you need to use your life insurance policy for collateral assignment, the process is as simple as buying a policy and filling out the appropriate paperwork.

Frequently asked questions

A collateral assignment of life insurance directs your insurance provider to use your death benefit to pay off an existing loan if you die while in debt. After the lender is paid, any remaining funds go to your policy’s beneficiaries.

Your lender is the assignee of your collateral assignment agreement. You are the assignor of the agreement and the owner of your life insurance policy.

Collateral assignment can only be revoked if your lender confirms that your debt is paid and sends a release of collateral assignment to your insurer. The assignment cannot be changed if you change your mind or if your life insurance policy lapses.

Amanda Shih

Editor & Licensed Life Insurance Expert

Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

Questions about this page? Email us at [email protected] .

Assignment of benefits

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 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.

That’s why we offer a Responsible Repair discount for homeowners who retain their rights during a claim. It’s about a 5 percent discount on average to reward you for proactively protecting yourself and preventing fraud.

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:

Sometimes the assignment of benefits limits the scope to 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 impacts 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:

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:

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 .

What Is a Life Insurance Assignment?

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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Assignment of Insurance definition

Examples of assignment of insurance in a sentence.

Topic #595 Assignment of Insurance BenefitsAssignment of insurance benefits is the process by which a specified party (for example, provider or policyholder) becomes entitled to receive payment for claims in accordance with the insurance company policies.

Topic #595 Assignment of Insurance BenefitsAssignment of insurance benefits is the process by which a specified party (e.g., provider or policyholder) becomes entitled to receive payment for claims in accordance with the insurance company policies.

Assignment of Insurance BenefitsI hereby assign all applicable health insurance benefits to which I and/or my dependents are entitled to Provider.

Assignment of Insurance Benefits and Release of InformationI authorize the release of any medical or other information necessary to process my claims.

The Court finds that the Assignment of Insurance by InEx to the Non-Louisiana Subclass is valid, binding, and enforceable.

More Definitions of Assignment of Insurance

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:

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.

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:

Key Takeaways

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.

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Insurance Assignment Agreement

Create a high quality document online now!

Updated October 30, 2021

An insurance assignment allows a beneficiary (assignor) to transfer all or a portion of the proceeds to someone else (assignee). This is especially common with life insurance when a family does not have the money to pay for the funeral expenses and chooses to assign a portion of the decedent’s life insurance proceeds to cover the funeral costs.

Can be Used for

Assigning Life Insurance Proceeds

When assigning life insurance proceeds (such as to a funeral home ), the beneficiary will commonly assign the costs for the specific service only (not the entire life insurance amount).

Sample – Insurance Assignment

Download: Adobe PDF , MS Word , OpenDocument

How to Write

I the parties.

(1) Assignment Effective Date. The first day this document makes its assignment conditions and terms active should be established at the beginning of the first article.

(2) Beneficiary. The Insurance Policy Beneficiary will have to be identified for this assignment to function properly. This will be the Party who is designated on the concerned insurance policy as the Recipient of its benefits (i.e. payment). Produce this Beneficiary’s full name and address.

(3) Assuming Party. The Party who shall be entitled to some or all of the beneficiary payout of the concerned insurance policy must be named and his or her mailing address documented.

(4) Insurance Company. The name of the Insurance Company where the policy is held must be presented in its entirety. This must be its legal name including the status suffix it was registered under as an Entity.

II. Assignment Of Insurance Proceeds

(5) Policy Number. Identify the policy number the Insurance Company has assigned to the account where the discussed payments shall originate.

(6) Assigning All Proceeds. The Beneficiary must establish the portion of the payment that will be assigned to the Assuming Party. If this assignment will, however, deliver the entire insurance payment to the Assuming Party then the language of the first checkbox statement should be adopted as the definition to the second article. To arrange for the full dollar amount of the insurance proceeds to be assigned to the Assuming Party, select the first checkbox statement.

(7) Designating A Portion Of Proceeds . As mentioned, the Beneficiary may only need to assign a portion of the insurance proceeds to the Assuming Party. This can be done with a selection of the second checkbox statement available. This definition will need the exact dollar amount to be delivered to the Assuming Party documented where requested.

IV. Additional Terms

(8) Full Terms And Conditions. This assignment must be fully defined before it is signed. Therefore, if there are any specifics that have not been covered thus far then present them as “Additional Terms” in the space provided.

V. Entire Agreement

(9) Beneficiary Signature. The intent of the Beneficiary to release funds from an insurance policy through this assignment must be verifiable. To this end, the Beneficiary must sign this assignment under the direction of an active Notary Public.

(10) Date. Immediately after signing this document, the Beneficiary must document the current date.

(11) Printed Name.

Notary Acknowledgment

(12) Notarization. As mentioned, it is imperative that the Beneficiary’s signature can be verified as an authentic signature. The Notary Public will be able to show the Beneficiary’s identity and signing as verifiable through the notarization process. Thus, only the Notary Public who has completed the notarization process on the provided signature can supply the acknowledgment needed in the final section.

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Business and industry

Insurance Policyholder Taxation Manual

Iptm7360 - assignments: when chargeable events arise, assignments for money or money’s worth.

The assignment of all the rights under a life insurance policy, capital redemption policy or life annuity contract (a ‘whole assignment’) is normally a chargeable event if it is for money or money’s worth. Exceptions are time-served qualifying policies in certain circumstances, as described in IPTM7310 and the specific exceptions described in IPTM7365 .

This only applies to assignments of the beneficial interest in the policy. An assignment of the legal ownership only, leaving the beneficial ownership unchanged, is not a chargeable event. A whole assignment not for money or money’s worth is not a chargeable event.

Meaning of ‘money or money’s worth’

‘Money or money’s worth’ has a wider meaning than simply just cash, for instance if an individual transferred beneficial ownership of a policy to another person in return for a valuable asset then that would be an assignment for money’s worth.

In many cases an insurer will have information about an assignment which will enable it to decide whether the assignment was for money or money’s worth, and so whether chargeable event certificates need to be issued. The Stamp Duty category is not always a sound indicator of whether consideration has been given on the assignment because the wrong deed is sometimes used.

IPTM7370 to IPTM7385 give guidance on whether an assignment is for money or money’s worth in certain cases, such as on divorce. In other cases, the insurer is entitled to assume that an assignment is not for money or money’s worth unless it has information indicating that the assignment was for money or money’s worth, for instance that the purchaser of the policy is a dealer in second-hand policies. It is not required to enquire further into the nature of a particular assignment.

Where the assignment is pursuant to a court order, it is not for money or money’s worth. This is only likely to arise on divorce or separation.

Part assignments for money or money’s worth

An assignment of part of the rights (a ‘part assignment’) for money or money’s worth might be a chargeable event in its own right if a transaction-related calculation shows a gain. Or it may give rise to an ‘excess event’. These questions are considered in detail in IPTM7600 onwards.

Part assignments not for money or money’s worth

A part assignment which occurs in an insurance year beginning on or after 6 April 2001 that is not for money or money’s worth, for instance by way of gift, cannot be a chargeable event or give rise to an excess event.

A part assignment not for money or money’s worth that occurred in an insurance year beginning before 6 April 2001 may have given rise to an excess event under the pre-FA01 legislation. The gain on such an event should be deducted in computing the gain on a later full surrender, maturity, whole assignment or death in the same way as for gains on other excess events - see IPTM7510 for the calculation rule.

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