What Is an Assignee in Life Insurance?

An assignee is an individual, company, or entity to whom certain rights, benefits, or property are legally transferred from another party, known as the assignor. This transfer is called an assignment. In life insurance, an assignment involves the policy owner transferring some or all policy rights to another party. This allows a policy to be used for various financial purposes beyond its primary role of providing a death benefit.

Defining an Assignee in Life Insurance

An assignee in life insurance is the party that receives ownership rights or specific benefits of a policy from the original policy owner, the assignor. The rights that can be assigned are comprehensive, encompassing the right to receive policy proceeds, the ability to borrow against the policy’s cash value, or to surrender the policy for its cash value.

Life insurance policies are assigned for various reasons, often to leverage the policy’s value during the insured’s lifetime. A common scenario involves using the policy as collateral for a loan, such as a business loan, a mortgage, or a personal line of credit. This provides the lender with security for the debt. Assignments also occur in business transactions, for estate planning, or as an outright gift or sale of the policy.

Assignee vs. Beneficiary: Key Differences

The roles of an assignee and a beneficiary in a life insurance policy are distinct, differing in the nature and timing of their claims. A beneficiary is designated by the policy owner to receive the death benefit when the insured dies. Their interest is contingent upon the insured’s death and is prospective.

In contrast, an assignee acquires specific rights or an interest in the policy during the insured’s lifetime. If the assignment is for debt, the assignee’s claim to the death benefit is limited to the outstanding debt. An assignee holds a present interest in the policy’s value or rights, while a beneficiary’s interest is contingent on a future event.

Regarding control, the policy owner, or an assignee with full ownership rights, possesses decision-making authority over the policy. This includes changing beneficiaries, taking policy loans, or surrendering the policy. A beneficiary has no control over the policy or its terms during the insured’s lifetime.

Types of Life Insurance Policy Assignments

Life insurance policy assignments fall into two main categories: absolute and collateral. An absolute assignment involves a complete, permanent, and irrevocable transfer of all policy rights and ownership from the assignor to the assignee. The assignor relinquishes all control and interest, and the assignee becomes the new policy owner.

Absolute assignments are common when selling a policy, gifting it to a family member or trust, or transferring ownership as part of a business succession plan. The assignee assumes full responsibility for the policy, including premium payments and all policy decisions. This assignment is irreversible without the assignee’s consent.

A collateral assignment, conversely, is a temporary and conditional transfer of certain policy rights, primarily used as security for a debt or loan. The assignee’s claim is limited to the outstanding debt amount, providing a priority claim on the death benefit up to that value. Once the debt is fully repaid, the policy rights revert to the original policy owner, and the assignment is terminated. This type of assignment is used for securing business loans, mortgages, or personal loans.

Impact of Assigning a Life Insurance Policy

Once a life insurance policy is assigned and acknowledged by the insurer, the assignee’s rights become effective. For an absolute assignment, the assignee becomes the new policy owner, gaining full authority over policy decisions. This includes changing beneficiaries, accessing the policy’s cash value through loans or withdrawals, or surrendering the policy. The original policy owner, the assignor, no longer possesses any rights or control over the policy. Transferring ownership may also have tax implications, such as gift tax considerations if the policy’s value exceeds annual exclusion limits, or income tax if sold for more than premiums paid.

For a collateral assignment, the assignee, typically a lender, has a priority claim on the death benefit up to the amount of the outstanding debt. If the insured dies while the debt is active, the lender is paid first from the death benefit. Any remaining proceeds are then paid to the designated beneficiaries or the policy owner’s estate. The original policy owner retains residual rights not transferred, such as changing beneficiaries for any death benefit amount exceeding the collateralized debt.

Notifying the insurance company is a procedural step for any assignment to be valid and enforceable. An assignment is not binding on the insurer until they receive proper written notification and acknowledgment. This notification ensures the insurer is aware of the change in rights and can direct claims and communications to the correct party. Without proper notification, the assignment may not be recognized, leading to complications in a claim payout.