What is a life insurance assignment and when is it used?

A life insurance assignment transfers certain rights or interests in a policy from the policy owner (the assignor) to another party (the assignee). There are two types: collateral assignments and absolute assignments.

A collateral assignment is temporary—used when pledging a life insurance policy as collateral for a loan. The lender (bank, SBA, etc.) holds the assignment until the loan is repaid. If the insured dies before the loan is repaid, the lender receives the outstanding loan balance from the death benefit first; the remaining balance goes to beneficiaries. When the loan is paid, the assignment is released.

An absolute assignment permanently transfers all ownership rights to another party. This is used when gifting a policy to an irrevocable trust (ILIT), transferring ownership to a charity, or when a business arrangement requires permanent transfer. An absolute assignment to a charity may generate a tax deduction.

Assignments must be documented in writing and submitted to the carrier. The carrier records the assignment and future communications regarding the policy may go to the assignee. In Nevada, assignments may have community property implications if the policy was purchased with marital funds. Consult an attorney if an assignment involves complex ownership or community property questions.