The bank may require borrowers to have a Life Insurance policy to secure a loan in the event of the borrowers death. Which provision gives the bank proportional protection but not control of the policy?

• A. Beneficiary designation
• B. Assignment on death
• C. Waiver
• D. Collateral Assignment

Answer: (D)

When a lender wants to secure a loan with life insurance without taking over ownership of the policy, the mechanism used is collateral assignment. This arrangement gives the bank a lien on the policy’s death benefit proportional to the outstanding loan, while the borrower keeps ownership of the policy and retains control over its ownership, policyholder rights, and who is named as beneficiary.

In practice, the collateral assignment means the bank will be entitled to receive proceeds up to the loan amount if the borrower dies. Any remaining death benefit beyond the loan balance remains with the policy owner or is paid to the designated beneficiary. This provides the bank with protection tied to the loan, but it does not grant the bank control over the policy itself.

Other options would either move ownership or direct control of the proceeds to the bank (beneficiary designations or full assignment on death) or reduce the borrower’s protection (a waiver), which is why collateral assignment best fits the idea of proportional protection without taking control.