Primerica Life Producer Practice Test

What provision allows a business owner to use a life insurance policy to secure a loan?

1. Beneficiary assignment

2. Cash value assignment

3. Collateral assignment

4. Absolute assignment

The correct answer is: Collateral assignment

The provision that allows a business owner to use a life insurance policy to secure a loan is collateral assignment. This type of assignment involves temporarily transferring the rights to the policy's death benefit to a lender as collateral for the loan. In a collateral assignment, the lender has a claim to the policy's proceeds in the event of the insured’s death, but the policyowner retains ownership and can continue to make premium payments and modify the policy. Once the loan is paid off, the assignment is usually canceled, and the ownership rights fully revert to the policyowner. This method is commonly utilized in business scenarios where the loan is necessary for operations or expansion, and effectively utilizing insurance can provide lenders with additional security against defaults. It facilitates securing the loan while maintaining the policyowner's rights to the policy during the term of the loan.