West Virginia State Life Insurance Practice Exam

What action can a policy owner take if an application for a bank loan requires collateral?

1. Cash in the policy

2. Assign policy ownership to the bank

3. Increase the coverage amount

4. Take a loan against the policy

The correct answer is: Assign policy ownership to the bank

When a policy owner is faced with the need for collateral for a bank loan, assigning policy ownership to the bank is a viable option. This action allows the bank to have a claim to the policy, ensuring their financial interest is secured. By assigning ownership, the bank can enforce rights over the policy, which might include collecting on the death benefit or cash value if the loan is defaulted on. This method provides the bank with a sense of security in the loan transaction, as they are essentially becoming the owner of the collateral until the loan is repaid. The policyholder retains some rights, such as the ability to continue paying premiums, but the bank will hold a significant interest in the policy. Other options, such as cashing in the policy or taking a loan against it, would provide immediate cash but may not serve the bank's requirement for collateral in the same way. Increasing the coverage amount does not directly relate to the need for collateral either, as it does not secure the bank's interest in the loan. Therefore, assigning the policy to the bank effectively addresses the bank's need for collateral on the loan.