What Are the Two Types of Assignments in Life Insurance?

Life insurance policies represent valuable assets. Assignment is a legal process where the policyholder transfers some or all of their rights and benefits to another party. This allows policyholders to adapt their coverage to evolving financial needs. The party transferring rights is the assignor, and the recipient is the assignee.

Absolute Assignment

An absolute assignment involves a complete and irrevocable transfer of all ownership rights, title, and interest in a life insurance policy from the original policyholder to another individual or entity. Once this transfer is formally accepted by the insurer, the assignee becomes the new owner of the policy, gaining full control over its provisions. The original policyholder, or assignor, relinquishes all authority, including the ability to change beneficiaries, surrender the policy for its cash value, or take out loans against it.

Absolute assignments are commonly used in situations where the policyholder intends a permanent transfer of the policy’s value. This can include gifting a policy to a family member, such as a spouse or child, as part of estate planning. When gifting a policy, the transfer is subject to gift tax regulations, with the annual gift tax exclusion ($19,000 for 2025) potentially applying. Another frequent use is donating a life insurance policy to a qualified charitable organization. An irrevocable transfer to a 501(c)(3) public charity can provide a charitable income tax deduction. Donating a policy can also help reduce the donor’s taxable estate.

Collateral Assignment

A collateral assignment represents a temporary and conditional transfer of specific policy rights, primarily to secure a debt or loan. Unlike an absolute assignment, the original policyholder retains residual ownership rights over the policy. The assignee, typically a lender, only holds a claim on the policy’s proceeds up to the amount of the outstanding debt.

This type of assignment is frequently used when a life insurance policy serves as collateral for various financial obligations, such as bank loans, business loans, or mortgages. Lenders often require a collateral assignment to ensure repayment if the borrower dies or defaults on the loan. For instance, Small Business Administration (SBA) loans commonly require life insurance as collateral.

When a collateral assignment is in place, the policyholder must keep the policy current, ensuring premiums are paid. The policy’s death benefit must generally match or exceed the loan amount and term. Upon full repayment of the debt, the collateral assignment is released, and all rights revert back to the original policyholder.

The beneficiary designation is handled distinctly in a collateral assignment. While beneficiaries are still named, their claim to the death benefit is subordinate to the lender’s claim until the debt is fully satisfied. If the policyholder dies with an outstanding loan balance, the lender receives the amount owed from the death benefit, and any remaining proceeds are then distributed to the designated beneficiaries. The lender acts as an assignee, not a beneficiary, and can only claim the precise amount required to settle the loan.

Comparing the Two Assignments

Absolute and collateral assignments serve distinct purposes in managing life insurance policies, differing significantly in the scope and permanence of the transferred rights. An absolute assignment involves a complete and permanent transfer of all ownership rights, effectively making the assignee the new policy owner. In contrast, a collateral assignment entails a limited and conditional transfer, primarily as security for a debt, with the original policyholder retaining underlying ownership.

The revocability of each assignment type is a key differentiator. Absolute assignments are generally irrevocable, meaning they cannot be reversed without the new owner’s consent. Conversely, collateral assignments are revocable; they automatically terminate and revert to the original policyholder once the secured debt is fully repaid. This difference in duration means an absolute assignment is permanent, while a collateral assignment is temporary, lasting only for the loan’s term.

The primary purpose behind each assignment also varies. Absolute assignments are typically used for permanent transfers, such as gifting or donating to charity. Collateral assignments are exclusively used to secure a financial obligation, providing a lender with a claim on the policy’s value. The level of control retained by the assignor also differs; in an absolute assignment, the assignor loses all control, whereas in a collateral assignment, they maintain residual control. The impact on beneficiaries is also distinct: the new policy owner in an absolute assignment gains the right to change beneficiary designations, while in a collateral assignment, beneficiaries’ claims are subordinated to the lender’s claim until the debt is satisfied.