What Is a Policy Assignment in Insurance?

A policy assignment in insurance involves the transfer of rights and ownership from an original policyholder to another party. This mechanism allows a policy’s value or benefits to be utilized for various financial strategies, such as securing a loan.

Defining Policy Assignment

A policy assignment is a legal process where the rights, title, and benefits of an insurance policy are transferred from the original policyholder, known as the assignor, to another individual or entity, called the assignee. The purpose of such an assignment often includes using the policy as collateral for a loan, gifting the policy, or transferring its ownership as part of a financial arrangement. Policy assignments are applicable to various types of insurance, including life insurance and, in some cases, property insurance. Life insurance is a common example where these assignments are utilized for purposes like securing debt. The process ensures that the assignee receives the specified policy benefits under the agreed terms.

Types of Policy Assignments

Policy assignments primarily fall into two categories: absolute assignment and collateral assignment.

Absolute assignment involves a complete and permanent transfer of all rights and ownership of the policy from the assignor to the assignee. The original policyholder relinquishes all control, including the ability to change beneficiaries, access cash values, or make other policy modifications. This type of assignment is typically irrevocable and is often used for gifting a policy, in estate planning, or in business succession planning.

Collateral assignment is a partial and temporary transfer of specific rights in the policy, primarily as security for a debt or obligation. The assignor retains primary ownership, and the assignment is effective only until the debt is repaid. If the policyholder passes away before the loan is settled, the lender, as the assignee, can claim the outstanding loan amount from the death benefit. Any remaining proceeds go to the policy’s designated beneficiaries.

Parties Involved in an Assignment

Three main parties participate in an insurance policy assignment. Each party has specific responsibilities and gains or relinquishes certain controls over the policy.

The assignor is the original policyholder who initiates the transfer of rights, title, or ownership of their insurance policy. The assignor decides to give up some or all control over the policy, depending on the type of assignment.

The assignee is the individual or entity that receives the rights to the insurance policy from the assignor. This party gains specific controls and benefits, such as the right to receive policy proceeds or exercise certain policy options, based on the terms of the assignment. The assignee could be a lender, a family member, or any other party with a legitimate interest in the policy.

The insurer is the insurance company that issued the policy and must acknowledge and record the assignment. The insurer processes the assignment request, ensuring it complies with policy provisions, and recognizing the assignee as the new legal party with rights to the policy. Notification to the insurer is a mandatory step for the assignment to be effective.

The Process of Assignment

Executing a policy assignment involves several procedural steps to ensure the legal transfer of rights.

The process begins with gathering necessary information, including full policy details and accurate identification of both the assignor and assignee. Insurers provide specific assignment forms that must be used for this purpose. These forms are often available on the insurer’s website or can be requested directly from their customer service.

Once the appropriate form is obtained, it must be completed accurately, often requiring signatures from both the assignor and assignee, and sometimes notarization, depending on the insurer’s requirements. The completed form, along with any other required documents, must then be submitted to the insurance company. Submitting the form can be done via mail, through an online portal, or directly to a specific department within the insurer. After submission, the insurer will process the request and provide confirmation of the recorded assignment, which formally recognizes the transfer of rights.

Effects of a Policy Assignment

A completed policy assignment immediately alters the legal standing and responsibilities concerning the insurance policy for all involved parties.

For the assignee, the primary effect is gaining specific rights to the policy, which can include the right to receive the death benefit or maturity proceeds, depending on the type of assignment. In collateral assignments, the assignee gains the right to collect up to the amount of the outstanding debt from the policy proceeds. For absolute assignments, the assignee acquires full ownership and control, enabling them to make decisions regarding the policy.

The assignor relinquishes certain rights and control over the policy upon assignment. In an absolute assignment, the assignor gives up all rights, including the ability to change beneficiaries or surrender the policy. With a collateral assignment, the assignor retains primary ownership but grants the assignee a security interest, meaning the policy’s benefits are tied to the repayment of a debt. The insurer’s obligation shifts to recognize the assignee as the legitimate party with rights to the policy, ensuring that policy benefits are directed according to the assignment terms.