Massachusetts Health & Accident Insurance Practice Exam

What differentiates Absolute Assignment from Collateral Assignment?

1. Absolute is conditional, collateral is unconditional

2. Absolute is temporary, collateral is permanent

3. Absolute is a permanent transfer, collateral is temporary

4. Absolute covers health insurance, collateral covers life insurance

The correct answer is: Absolute is a permanent transfer, collateral is temporary

The distinction between Absolute Assignment and Collateral Assignment lies in the nature and permanence of the transfer of rights in an insurance policy. Absolute Assignment refers to a complete and permanent transfer of the ownership rights of the policy from the original policyholder to another party. This means that the new owner now has full control over the policy, including the right to change beneficiaries, access cash values, and make any decisions regarding the coverage. In contrast, Collateral Assignment is temporary and typically used to secure a loan or obligation. In this arrangement, the policyholder retains ownership of the policy while granting the lender certain rights to the policy's benefits or cash value as collateral until the obligation is fulfilled. If the policyholder defaults on the obligation, the lender may access the policy benefits, but ownership doesn’t change permanently. Understanding this distinction is crucial in the context of insurance practices as it affects how policies can be used in financial transactions and the rights of the parties involved.