Contract assignment

When a borrower borrows some money from the lender, he/she requires collateral to provide security in case he cannot pay the interest payments or he fails to pay back the loaned amount. In this case the collateral can be repossessed by the lender. Collateral assignment is the transfer of the right of ownership of an asset to the lender in exchange for loan. The ownership and management of the asset has to be done with the consent of the lender. Once the borrower pays back the complete loan, he/she can then acquire the ownership and control of the asset.

The lender can also ask the borrower to define life insurance as a form of collateral assignment. The borrower can borrow money against his life insurance. The collateral assignment in this case would serve to give the borrower a certain amount of leverage for further investment, personal use or business investment. The borrower can get financial stability immediately against their life insurance. Once the borrower pays back the loan the lender would relinquish any claims on the life insurance which means that the insurance policy will serve as an asset for a person even during their lifetime and they can borrow money against it.

In the event of the demise of the borrower the debt obligation of the lender is fulfilled firstly from the insurance money. Therefore, the lender is also assured with the guarantee of receiving his money back. The advantage of such an arrangement rest on the fact that aside from the loan amount owed to the creditors, the rest of the money of the insurance is disposed of according to the will of the insured. The insured can designate the beneficiaries and the executor of the life insurance.

The fact that in event of repayment the lender will have no claim on the cash policy of life insurance means that the borrower is motivated to pay back the loan during his or her lifetime; otherwise, it would be deducted from the life insurance. Using life insurance is beneficial in this case because it is not a real asset like a home or an estate which a person could lose and become impoverished. Life insurance is realized on the death of the insured and, therefore, gives everyone enough money and time to settle debts without selling off any significant assets.

However, a minor caveat is that once the collateral assignment has been made, the policy owner requires the consent or permission of the lender in order to withdraw cash values, take a policy loan, retransfer the ownership of the policy, or change the beneficiary designation. This limits the control of the policy owner over his insurance policy to a certain degree.

Such an arrangement is highly secure for the lender as well because it ensures that he gets his money back in every case. The money from insurance is paid lump sum along with the interest. Any remaining amount from the insurance policy is then paid to the beneficiary. The lender or assignee faces minimal risk in collateral assignment.

In order to make collateral assignments effective it is essential to notify the insurance company of the assignment such that they are notified and aware of this arrangement. If the insurance company is not aware of a collateral assignment it could end up paying to the beneficiary or another assignee, which would cause problems for the lender and the surviving family.

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