Colorado Life Producer License Practice Test

Is collateral assignment considered an example of third-party ownership?

1. Yes

2. No

3. Only if specified

4. It depends on the state

The correct answer is: No

Collateral assignment is not considered an example of third-party ownership because it does not transfer ownership of the policy to another party. In a collateral assignment, the policyholder retains ownership of the life insurance policy while assigning certain rights — typically, the right to collect the death benefit — to a creditor or another party as collateral for a loan or obligation. This is a temporary arrangement where the rights are limited to the specified purpose, and the ownership of the policy remains with the original policyholder. In contrast, third-party ownership occurs when someone other than the insured individual or the policyholder owns the policy. This includes scenarios where a spouse, parent, or business owns a policy on the life of another person. Therefore, since collateral assignment does not change the ownership of the insurance policy but rather assigns some rights, it does not fit into the definition of third-party ownership.