An absolute assignment of a life insurance policy involves transferring all rights and ownership decisions to another party. You could have one of several reasons for wanting to do this; for example, using the policy as collateral for a loan, or making a donation to your favorite charity at death. Making an absolute assignment is relatively simple as long as your life insurance policy allows it.
How Transfer of Ownership Works
Absolute assignment is akin to a transfer of ownership, in that you are giving all ownership rights to another party. Although you remain the insured under the contract, the new party can change the beneficiary (usually to itself), it can make decisions about investment options of a whole-life policy, and it can take any other action that does not jeopardize the policy's in-force status. You remain responsible for the premium payments, and you could be in breach of the assignment provisions if you don't pay them.
Collateral Loan Bank Assignment
Absolute assignment of life insurance is often done when a person applies for a loan. If the bank is concerned that the loan might not be repaid if you died, if might require a life policy with an absolute assignment to the bank. The bank names itself the beneficiary of the policy up to the amount of the loan balance. Any residual death benefit would go to your named beneficiary.
Financing a Charitable Gift
Another use of absolute assignment is to make a charitable gift. This approach is gaining in popularity.
Life insurance is often purchased to finance a charitable donation by the estate of a deceased individual. One drawback to this approach is that the entire gift goes through the estate and might incur probate delays and fees.
The use of an absolute assignment streamlines the process, as the charity can name itself the beneficiary of the policy. The charity can issue you a tax receipt for every premium, which you can deduct as a charitable contribution.
Absolute Assignment Legal Considerations
Insurance companies freely provide assignment forms that are straightforward and easy to fill out. Once an assignment is complete, a copy of the form should be filed with the insurance company.
The life insurance company may withhold part of its payout to any beneficiary -- including a newly designated one -- if a premium hasn't been fully paid, or because of other indebtedness. That might have legal ramifications for you and the assignee, in which the insurance company will take no part.
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