What happens to the collateral assignment when the loan is repaid?

• A. The assignment is revoked and ownership returns to the original owner
• B. The assignment becomes permanent
• C. The assignment transfers ownership to the lender
• D. The policy terminates

Answer: (A)

When a life insurance policy is used as collateral for a loan, the lender gains a security interest through a collateral assignment. This means the borrower generally remains the policy owner, but the lender has rights to the policy’s proceeds up to the loan amount to secure repayment.

Once the loan is fully repaid, that security interest is satisfied. The assignment is revoked, and ownership and full control of the policy revert to the original owner. The policy itself continues in force if premiums keep being paid, and the lender no longer has any claim under that assignment. This is why the correct understanding is that the collateral assignment is revoked and ownership returns to the original owner after repayment.