A policyowner borrows money from a bank and assigns the life insurance policy to the bank as security for the loan. This type of transfer is called a(n):

Why A is correct

A collateral assignment transfers the life insurance policy to a creditor as security for a loan, typically for the amount of the debt. The creditor holds an interest in the policy's death benefit or cash value up to the outstanding loan balance, while the policyowner retains ownership and continues to control most rights in the policy. When the debt is repaid, the assignment ends. This differs from an absolute assignment, which transfers full ownership of the policy to another person with no intent to reclaim it.

Why the other options are wrong

• An absolute assignment transfers complete ownership and all rights in the policy to the assignee permanently; it is not a temporary transfer made to secure a debt. This choice does not fit the arrangement described in the question, so it is clearly not the right option to choose.
• An irrevocable beneficiary designation names a beneficiary whose consent is required for any changes; it does not involve transferring the policy to a creditor. Accordingly, this option is not correct because it does not match the specific rule or product that is described in the question.
• Reinstatement restores a lapsed policy to full force; it has nothing to do with using the policy as collateral for a bank loan. This option therefore does not match the facts presented in the question and is not the correct answer to select.

Memory hook

Collateral is a temporary pledge; absolute is a permanent handover.