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Life Insurance Assignments: Definition & Parties

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

In this lesson, we will review how life insurance contract ownership rights can be transferred through an assignment and identify the different parties involved.

Life Insurance Assignment

Jim is buying his first home, but the lender is concerned that if he died, the total value of his estate wouldn't be enough to pay off the mortgage for the property. The lender has proposed having Jim assign his life insurance policy so that this situation won't happen. Since Jim has never heard of an assignment before, let's take a look at what one is along with the roles and rights of the different legal parties involved in this arrangement.

Definition

What is an assignment of a life insurance policy? Jim currently has a whole life insurance policy that pays $1,000,000 on his death and the premiums are fully paid up. An assignment is the transfer of the ownership rights for that policy to another person or business. What this means is that the lender is now the owner of the policy and has the right to collect the unpaid balance of the loan from the insurance proceeds if Jim dies, and then transfer the remainder to Jim's named beneficiary. This is necessary because if Jim just made the lender the beneficiary of the policy, he could potentially change it to someone else after the loan is made. By transferring the ownership rights, the lender gains additional financial security from the insurance policy, acting as collateral.

What happens if Jim lives long enough to pay off the loan? He wouldn't want to have completely given up the rights to his insurance policy. A conditional assignment allows the ownership rights to revert back to Jim if a certain event occurs, such as paying off the loan. A total and irrevocable assignment would be known as an absolute assignment.

Parties

There are three main parties to an assignment of a life insurance contract. In our example, Jim is the assignor who grants ownership rights to his lender, the assignee. Jim had originally designated a grandchild as the beneficiary. If Jim dies after the contract has been assigned, the lender will exercise its right as the owner to receive an amount equal to the portion of the loan that remains unpaid. The balance would then go to Jim's named beneficiary.

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