Two Types of Assignments in Insurance
Assignment describes transferring ownership of your life insurance policy to another individual, corporation or trustee. You are still insured under the policy, but you no longer own the insurance.
Unless your insurance policy contains a limitation on assignment, you are free to assign the policy. The two types of assignments for conventional insurance policies are absolute assignment and collateral assignment. In an assignment, you are the assigner and the person receiving ownership is the assignee.
An absolute assignment transfers all the rights in the insurance policy to the assignee, including the responsibility to pay any remaining premiums. Depending on the insurance policy, the terminology of absolute assignments varies. For example, some insurance policies have an ownership clause. The basic thing to know is that you transfer all rights, title and interest in the policy to the assignee.
A collateral assignment transfers only certain rights in an insurance policy. For example, lenders may require a collateral assignment when you take out a loan, to ensure that the loan is repaid if you die.
After you repay the loan, the assignee releases the interest in the policy. If you die, the assignee will be paid before the beneficiary is paid.
Reasons for Assignment
In addition to assignments to lenders, another reason for assignment of insurance is to comply with a divorce court order requiring that your former spouse and/or children from a previous marriage be named as the beneficiaries. You can also assign insurance to an irrevocable life insurance trust for inheritance tax purposes.
Putting the insurance in a trust removes the life insurance policy from your estate and your control, but means that the proceeds from the life insurance are not included in calculating your estate tax. You can also assign an insurance policy as part of a viatical settlement.
In a viatical settlement, you sell the policy (or part of it) at a price that is less than the policy's death benefit to an investor. When you die, the investor collects the death benefit.
To protect the assignee, you must always notify the insurance company when you assign an insurance policy.
If an insurance company does not have a notice of assignment and pays the insurance proceeds to a beneficiary or another assignee, the insurance company does not have to pay a second time. If the insurance policy has more than one assignee, the assignees are paid in an order starting with the earliest assignment.