Connecticut Life Producer Practice exam

What is the key difference between absolute and collateral assignment?

1. Absolute assignment is temporary; collateral assignment is permanent

2. Absolute assignment transfers all rights; collateral transfers partial rights

3. Collateral assignment allows for unlimited changes; absolute does not

4. Absolute assignment involves the insurer; collateral does not

The correct answer is: Absolute assignment transfers all rights; collateral transfers partial rights

The key difference between absolute assignment and collateral assignment lies in the nature of the rights that are transferred. In absolute assignment, the policyholder transfers all ownership rights of the life insurance policy to another individual or entity. This means that the new owner can control the policy entirely, including the ability to change beneficiaries, borrow against the policy, or even surrender it for its cash value. This transfer is complete and does not allow the original owner to reclaim any rights once the assignment is made. On the other hand, collateral assignment is a more limited form of assignment. It refers to the pledge of the policy as collateral for a debt or obligation. In this case, only specific rights are transferred temporarily to the lender or creditor, while the policyholder retains ownership. The collateral assignment generally allows the lender to claim the death benefit only up to the amount of the loan in case of the policyholder's death, after which the remaining benefits would go to the designated beneficiaries. This arrangement keeps the rights of ownership largely with the original policyholder unless the debt is forfeited or not repaid. This distinction between total and partial rights transfer effectively clarifies why the correct answer emphasizes that absolute assignment transfers all rights while collateral assignment only transfers partial rights.