Massachusetts Health & Accident Insurance Practice Exam

Which of the following is true regarding Collateral Assignment?

1. It is a permanent transfer of benefits

2. It can be revoked

3. It must be made in writing

4. It applies exclusively to life insurance

The correct answer is: It can be revoked

The statement that it can be revoked highlights an essential characteristic of collateral assignment. Collateral assignment is a temporary arrangement in which a policyholder assigns a portion of the benefits of their life insurance policy or other types of insurance as collateral for a loan or another obligation. Since it is not a permanent transfer, the policyholder retains the right to redeem or revoke the assignment. This flexibility allows the individual to maintain control over their policy and its benefits, unlike a permanent assignment where the rights are differently structured. In contrast, other statements suggest attributes that do not align with the nature of collateral assignments. For example, a permanent transfer of benefits would imply total relinquishment of rights, which is not characteristic of collateral assignment; it is inherently temporary. The requirement for written documentation is generally a good practice in insurance, but not all collateral assignments strictly mandate this formality under law. Lastly, suggesting that collateral assignment applies exclusively to life insurance fails to recognize that it can also be utilized in conjunction with other types of insurance products, depending on the terms of the policy. Understanding the nuances of collateral assignment is crucial for effectively managing insurance policy rights and obligations.