All the following statements concerning collateral assignment of a life insurance policy are correct EXCEPT:

• A. A collateral assignment is nothing more than a pledge subject to the general rules of law governing such a transaction.
• B. The pledgee becomes the absolute owner of the policy.
• C. If the pledgor dies before paying the debt for which the policy is security, the pledgee has a claim against the policy proceeds.
• D. A collateral assignment is intended to be temporary in nature.

Answer: (B)

Collateral assignment of a life insurance policy means the policy owner keeps ownership, while a lender gets a security interest in the policy’s benefits to secure a loan. The pledgee is not made the absolute owner of the policy; ownership remains with the pledgor. The lender’s rights are limited to the portion of the proceeds needed to cover the debt, so if the insured dies, the policy proceeds first satisfy the loan up to what is owed, and any remaining amount goes to the policyowner’s beneficiary or estate. This setup is temporary in nature—the security interest lasts until the debt is paid or the policy ends. The statement that the pledgee becomes the absolute owner would misstate the true nature of collateral assignment, which is why that option is the exception.