State RegulationsTX specificDifficulty 2/5
A Texas insured borrows money and signs a collateral assignment of his group life coverage to the lender purely as security for that loan. What is the effect?
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
Under TIC 1131.006, the insured's rights in group life coverage may be assigned, and an assignment given only as security for a debt is a collateral assignment: the assignee recovers only the amount of the indebtedness and any surplus proceeds belong to the beneficiary, while the insured retains the remaining incidents of ownership. Practically, the lender files the assignment as a creditor safeguard, not as a purchase of the coverage, and the assignment is released when the loan is repaid.
Why the other options are wrong
- A) describes an absolute assignment, not a collateral one; a collateral assignee has no right to redesignate the beneficiary or take the whole proceeds.
- C) is wrong because a collateral assignment of life insurance rights is a recognized and permitted security device under TIC 1131.006.
- D) is wrong because the collateral assignment reaches the coverage and its proceeds; it is not confined to a conversion value that exists only after coverage ends.
Memory hook
Collateral: creditor takes the debt, owner keeps the rest.