If a life insurance policy is collaterally assigned to a bank for a loan and the insured dies, how is the death benefit distributed?

Question: If a life insurance policy is collaterally assigned to a bank for a loan and the insured dies, how is the death benefit distributed?

Answer options: ✅ The lender receives the amount of the outstanding debt, and the beneficiary receives the remainder.

• Communication is cut off; the lender receives the entire death benefit.
• The policy is cancelled and the lender receives the cash value only.
• The beneficiary must pay the lender out of their own pocket before receiving the benefit.

Correct answer: The lender receives the amount of the outstanding debt, and the beneficiary receives the remainder.

Explanation: When a policy is 'Collaterally Assigned', it is used as security for a loan. The lender (assignee) is paid the amount of the outstanding debt from the death benefit first; the remaining balance is paid to the original beneficiary.