When a life insurance policy is used for a collateral assignment to secure a loan, what is the impact on the death benefit?

Question: When a life insurance policy is used for a collateral assignment to secure a loan, what is the impact on the death benefit?

Answer options:

• The creditor becomes the new owner of the policy. ✅ The creditor has a claim on the death benefit only to the extent of the outstanding debt.
• The policy is cancelled and the cash value is paid to the creditor.
• The beneficiary loses all rights to any portion of the death benefit.

Correct answer: The creditor has a claim on the death benefit only to the extent of the outstanding debt.

Explanation: A 'collateral assignment' is used when a policy is used as security for a loan. The creditor is paid only the amount of the outstanding debt from the death benefit, and any remaining balance goes to the policy's named beneficiary.