LLQP Ethics & Professional Practice · Component 1.2 · 60% of the exam
A bank takes a collateral assignment of a client's life policy to secure a loan. On the client's death the bank is entitled to:
- Anothing, because a collateral assignment lapses automatically on the death of the owner
- Bthe policy's cash surrender value only, with the death benefit paid to the estate
- Cthe full death benefit, regardless of how much of the loan remains outstanding
- the amount outstanding on the loan, with the balance going to the named beneficiary
Correct answer: D) the amount outstanding on the loan, with the balance going to the named beneficiary
A collateral assignment secures a debt rather than transferring ownership. The lender recovers what it is owed from the proceeds, and the remainder goes to the beneficiary named under the contract.
Why the other options are wrong
- AThe security survives death, which is the purpose of taking it.
- BThe assignment reaches the death benefit, not merely the cash value.
- CThe lender's interest is limited to the outstanding indebtedness.
Exam tip
A collateral assignment pays the debt first and the beneficiary takes the rest.
Common mistake
Treating a collateral assignment as an absolute transfer of the policy.
What this tests
CISRO competency component 1.2 — Integrate into practice the legal aspects of insurance and annuity contracts — which is weighted at 60% of the Ethics & Professional Practice module. Written against the published curriculum.
More from component 1
- An 'assignee' of a life insurance policy is:
- A corporation as policyowner and beneficiary of a policy on a key employee:
- A 'trustee' named to receive proceeds on behalf of a beneficiary:
- The 'automatic premium loan' (APL) provision:
- A life insurance contract 'matures' when:
- The 'assignment' provision typically states that:
Practice the whole Ethics & Professional Practice module
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