what is an assignment in insurance terms

Assignment in Insurance Policy | Meaning | Explanation | Types

Table of Contents

• 1 What is Assignment in an Insurance Policy?
• 2 Who can make an assignment?
• 3 What happens to the ownership of the policy upon Assignment?
• 4 Can assignment be changed or cancelled?
• 5 What happens if the assignment dies?
• 6 What is the procedure to make an assignment?
• 7 Is it necessary to Inform the insurer about assignment?
• 8 Can a policy be assigned to a minor person?
• 9 Who pays premium when a policy is assigned?
• 10.1 1. Conditional Assignment
• 10.2 2. Absolute Assignment

What is Assignment in an Insurance Policy?

Assignment means a complete transfer of the ownership of the policy to some other person. Usually assignment is done for the purpose of raising a loan from a bank or a financial institution .

Assignment is governed by Section 38 of the Insurance Act 1938 in India. Assignment can also be done in favour of a close relative when the policyholder wishes to give a gift to that relative. Such an assignment is done for “natural love and affection”. An example, a policyholder may assign his policy to his sister who is handicapped.

Who can make an assignment?

A policyholder who has policy on his own life can assign the policy to another person. However, a person to whom a policy has been assigned can reassign the policy to the policyholder or assign it to any other person. A nominee cannot make an assignment of the policy. Similarly, an assignee cannot make a nomination on the policy which is assigned to him.

What happens to the ownership of the policy upon Assignment?

When a policyholder assign a policy, he loses all control on the policy. It is no longer his property. It is now the assignee’s property whether the policyholder is alive or dead, the assignee alone will get the policy money from the insurance company.

If the assignee dies, then his (assignee’s) legal heirs will be entitled to the policy money.

Can assignment be changed or cancelled?

An assignment cannot be changed or cancelled. The assignee can of course, reassign the policy to the policyholder who assigned it to him. He can also assign the policy to any other person because it is now his property. We can think of a bank reassigning the policy to the policyholder when their loan is repaid.

What happens if the assignment dies?

If the assignee dies, the assignment does not get cancelled. The legal heirs of the assignee become entitled to the policy money. Assignment is a legal transfer of all the interests the policyholder has in the policy to the assignee.

What is the procedure to make an assignment?

Assignment can be made only after issue of the policy bond. The policyholder can either write out the wording on the policy bond (endorsement) or write it on a separate paper and get it stamped. (Stamp value is the same, as the stamp required for the policy — Twenty paise per one thousand sum assured). When assignment is made by an endorsement on the policy bond, there is no need for stamp because the policy is already stamped.

Is it necessary to Inform the insurer about assignment?

Yes, it is necessary to give information about assignment to the insurance company. The insurer will register the assignment in its records and from then on recognize the assignee as the owner of the policy. If someone has made more than one assignment, then the date of the notice will decide which assignment has priority. In the case of reassignment also, notice is necessary.

Can a policy be assigned to a minor person?

Assignment can be made in favour of a minor person. But it would be advisable to appoint a guardian to receive the policy money if it becomes due during the minority of the assignee.

Who pays premium when a policy is assigned?

When a policy is assigned normally, the assignee should pay the premium, because the policy is now his property. In practice, however, premium is paid by the assignor (policyholder) himself. When a bank gives a loan and takes the assignment of a policy a security, it will ask the assignor himself to pay the premium and keep it in force. In the case of an assignment as a gift, the assignor would like to pay the premium because he has gifted the policy.

Types of assignment

Assignment may take two forms:

• Conditional Assignment.
• Absolute Assignment.

1. Conditional Assignment

It would be useful where the policyholder desires the benefit of the policy to go to a near relative in the event of his earlier death. It is usually effected for consideration of natural love and affection. It generally provides for the right to revert the policyholder in the event of the assignee predeceasing the policyholder or the policyholder surviving to the date of maturity.

2. Absolute Assignment

This assignment is generally made for valuable consideration. It has the effect of passing the title in the policy absolutely to the assignee and the policyholder in no way retains any interest in the policy. The absolute assignee can deal with the policy in any manner he likes and may assign or transfer his interest to another person.

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Assignment Insurance

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What is Assignment Insurance?

Assignment Insurance is a type of insurance that may refer to a variety of policies related to the transfer of risk from one party to another. Assignment Insurance typically involves an individual or business accepting responsibility for the financial risk associated with a particular situation, asset, or activity. In some cases, it may also refer to the transfer of ownership of an insurance policy from one party to another.

Assignment Insurance in More Detail

For example, Assignment Insurance may be used when an individual or business takes on the financial risk associated with a particular asset or activity, such as the purchase of a home or a business venture. In this case, the insurer pays out the agreed upon amount of money to the recipient of the policy in the event of a loss, such as a fire or a natural disaster.

Assignment Insurance may also be used when an individual or business transfers the ownership of an insurance policy from one party to another. This may occur when a policyholder decides to sell their policy to another person, such as someone who can make better use of the policy or who can afford to pay the premiums.

Assignment Insurance is useful for individuals and businesses who need to transfer the responsibility of a particular asset or activity from one party to another. It can help to protect both parties involved in the transaction, as well as provide assurance that the financial burden associated with the asset or activity will be covered in the event of a loss.

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What Is a Collateral Assignment of Life Insurance?

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

A collateral assignment of life insurance is a conditional assignment appointing a lender as an assignee of a policy. Essentially, the lender has a claim to some or all of the death benefit until the loan is repaid. The death benefit is used as collateral for a loan.

The advantage to using a collateral assignee over naming the lender as a beneficiary is that you can specify that the lender is only entitled to a certain amount, namely the amount of the outstanding loan. That would allow your beneficiaries still be entitled to any remaining death benefit.

Lenders commonly require that life insurance serve as collateral for a business loan to guarantee repayment if the borrower dies or defaults. They may even require you to get a life insurance policy to be approved for a business loan.

Key Takeaways

• The borrower of a business loan using life insurance as collateral must be the policy owner, who may or may not be the insured.
• The collateral assignment helps you avoid naming a lender as a beneficiary.
• The collateral assignment may be against all or part of the policy's value.
• If any amount of the death benefit remains after the lender is paid, it is distributed to beneficiaries.
• Once the loan is fully repaid, the life insurance policy is no longer used as collateral.

How a Collateral Assignment of Life Insurance Works

Collateral assignments make sure the lender gets paid only what they are due. The borrower must be the owner of the policy, but they do not have to be the insured person. And the policy must remain current for the life of the loan, with the policy owner continuing to pay all premiums . You can use either term or whole life insurance policy as collateral, but the death benefit must meet the lender's terms.

A permanent life insurance policy with a cash value allows the lender access to the cash value to use as loan payment if the borrower defaults. Many lenders don't accept term life insurance policies as collateral because they do not accumulate cash value.

Alternately, the policy owner's access to the cash value is restricted to protect the collateral. If the loan is repaid before the borrower's death, the assignment is removed, and the lender is no longer the beneficiary of the death benefit.

Insurance companies must be notified of the collateral assignment of a policy. However, other than their obligation to meet the terms of the contract, they are not involved in the agreement.

Example of Collateral Assignment of Life Insurance

For example, say you have a business plan for a floral shop and need a $50,000 loan to get started. When you apply for the loan, the bank says you must have collateral in the form of a life insurance policy to back it up. You have a whole life insurance policy with a cash value of $65,000 and a death benefit of $300,000, which the bank accepts as collateral.

So, you then designate the bank as the policy's assignee until you repay the $50,000 loan. That way, the bank can ensure it will be repaid the funds it lent you, even if you died. In this case, because the cash value and death benefit is more than what you owe the lender, your beneficiaries would still inherit money.

Alternatives to Collateral Assignment of Life Insurance

Using a collateral assignment to secure a business loan can help you access the funds you need to start or grow your business. However, you would be at risk of losing your life insurance policy if you defaulted on the loan, meaning your beneficiaries may not receive the money you'd planned for them to inherit.

Consult with a financial advisor to discuss whether a collateral assignment or one of these alternatives may be most appropriate for your financial situation.

Life insurance loan (policy loan) : If you already have a life insurance policy with a cash value, you can likely borrow against it. Policy loans are not taxed and have less stringent requirements such as no credit or income checks. However, this option would not work if you do not already have a permanent life insurance policy because the cash value component takes time to build.

Surrendering your policy : You can also surrender your policy to access any cash value you've built up. However, your beneficiaries would no longer receive a death benefit.

Other loan types : Finally, you can apply for other loans, such as a personal loan, that do not require life insurance as collateral. You could use loans that rely on other types of collateral, such as a home equity loan that uses your home equity.

What Are the Benefits of Collateral Assignment of Life Insurance?

A collateral assignment of a life insurance policy may be required if you need a business loan. Lenders typically require life insurance as collateral for business loans because they guarantee repayment if the borrower dies. A policy with cash value can guarantee repayment if the borrower defaults.

What Kind of Life Insurance Can Be Used for Collateral?

You can typically use any type of life insurance policy as collateral for a business loan, depending on the lender's requirements. A permanent life insurance policy with a cash value allows the lender a source of funds to use if the borrower defaults. Some lenders may not accept term life insurance policies, which have no cash value. The lender will typically require the death benefit be a certain amount, depending on your loan size.

Is Collateral Assignment of Life Insurance Irrevocable?

A collateral assignment of life insurance is irrevocable. So, the policyholder may not use the cash value of a life insurance policy dedicated toward collateral for a loan until that loan has been repaid.

What is the Difference Between an Assignment and a Collateral Assignment?

With an absolute assignment , the entire ownership of the policy would be transferred to the assignee, or the lender. Then, the lender would be entitled to the full death benefit. With a collateral assignment, the lender is only entitled to the balance of the outstanding loan.

The Bottom Line

If you are applying for life insurance to secure your own business loan, remember you do not need to make the lender the beneficiary. Instead you can use a collateral assignment. Consult a financial advisor or insurance broker who can walk you through the process and explain its pros and cons as they apply to your situation.

Progressive. " Collateral Assignment of Life Insurance ."

Fidelity Life. " What Is a Collateral Assignment of a Life Insurance Policy? "

Kansas Legislative Research Department. " Collateral Assignment of Life Insurance Proceeds ."

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Assignment of Benefits: What You Need to Know

• August 17, 2022
• Steven Schwartzapfel

Insurance can be useful, but dealing with the back-and-forth between insurance companies and contractors, medical specialists, and others can be a time-consuming and ultimately unpleasant experience. You want your medical bills to be paid without having to act as a middleman between your healthcare provider and your insurer.

However, there’s a way you can streamline this process. With an assignment of benefits, you can designate your healthcare provider or any other insurance payout recipient as the go-to party for insurance claims. While this can be convenient, there are certain risks to keep in mind as well.

Below, we’ll explore what an assignment of insurance benefits is (as well as other forms of remediation), how it works, and when you should employ it. For more information, or to learn whether you may have a claim against an insurer, contact Schwartzapfel Lawyers now at 1-516-342-2200 .

What Is an Assignment of Benefits?

An assignment of benefits (AOB) is a legal process through which an insured individual or party signs paperwork that designates another party like a contractor, company, or healthcare provider as their insurance claimant .

Suppose you’re injured in a car accident and need to file a claim with your health insurance company for medical bills and related costs. However, you also need plenty of time to recover. The thought of constantly negotiating between your insurance company, your healthcare provider, and anyone else seems draining and unwelcome.

With an assignment of benefits, you can designate your healthcare provider as your insurance claimant. Then, your healthcare provider can request insurance payouts from your healthcare insurance provider directly.

Through this system, the health insurance provider directly pays your physician or hospital rather than paying you. This means you don’t have to pay your healthcare provider. It’s a streamlined, straightforward way to make sure insurance money gets where it needs to go. It also saves you time and prevents you from having to think about insurance payments unless absolutely necessary.

What Does an Assignment of Benefits Mean?

An AOB means that you designate another party as your insurance claimant. In the above example, that’s your healthcare provider, which could be a physician, hospital, or other organization.

With the assignment of insurance coverage, that healthcare provider can then make a claim for insurance payments directly to your insurance company. The insurance company then pays your healthcare provider directly, and you’re removed as the middleman.

As a bonus, this system sometimes cuts down on your overall costs by eliminating certain service fees. Since there’s only one transaction — the transaction between your healthcare provider and your health insurer — there’s only one set of service fees to contend with. You don’t have to deal with two sets of service fees from first receiving money from your insurance provider, then sending that money to your healthcare provider.

Ultimately, the point of an assignment of benefits is to make things easier for you, your insurer, and anyone else involved in the process.

What Types of Insurance Qualify for an Assignment of Benefits?

Most types of commonly held insurance can work with an assignment of benefits. These insurance types include car insurance, healthcare insurance, homeowners insurance, property insurance, and more.

Note that not all insurance companies allow you to use an assignment of benefits. For an assignment of benefits to work, the potential insurance claimant and the insurance company in question must each sign the paperwork and agree to the arrangement. This prevents fraud (to some extent) and ensures that every party goes into the arrangement with clear expectations.

If your insurance company does not accept assignments of benefits, you’ll have to take care of insurance payments the traditional way. There are many reasons why an insurance company may not accept an assignment of benefits.

To speak with a Schwartzapfel Lawyers expert about this directly, call 1-516-342-2200 for a free consultation today. It will be our privilege to assist you with all your legal questions, needs, and recovery efforts.

Who Uses Assignments of Benefits?

Many providers, services, and contractors use assignments of benefits. It’s often in their interests to accept an assignment of benefits since they can get paid for their work more quickly and make critical decisions without having to consult the insurance policyholder first.

Imagine a circumstance in which a homeowner wants a contractor to add a new room to their property. The contractor knows that the scale of the project could increase or shrink depending on the specifics of the job, the weather, and other factors.

If the homeowner uses an assignment of benefits to give the contractor rights to make insurance claims for the project, that contractor can then:

• Bill the insurer directly for their work. This is beneficial since it ensures that the contractor’s employees get paid promptly and they can purchase the supplies they need.
• Make important decisions to ensure that the project completes on time. For example, a contract can authorize another insurance claim for extra supplies without consulting with the homeowner beforehand, saving time and potentially money in the process.

Practically any company or organization that receives payments from insurance companies may choose to take advantage of an assignment of benefits with you. Example companies and providers include:

• Ambulance services
• Drug and biological companies
• Lab diagnostic services
• Hospitals and medical centers like clinics
• Certified medical professionals such as nurse anesthetists, nurse midwives, clinical psychologists, and others
• Ambulatory surgical center services
• Permanent repair and improvement contractors like carpenters, plumbers, roofers, restoration companies, and others
• Auto repair shops and mechanic organizations

Advantages of Using an Assignment of Benefits

An assignment of benefits can be an advantageous contract to employ, especially if you believe that you’ll need to pay a contractor, healthcare provider, and/or other organization via insurance payouts regularly for the near future.

These benefits include but are not limited to:

• Save time for yourself. Again, imagine a circumstance in which you are hospitalized and have to pay your healthcare provider through your health insurance payouts. If you use an assignment of benefits, you don’t have to make the payments personally or oversee the insurance payouts. Instead, you can focus on resting and recovering.
• Possibly save yourself money in the long run. As noted above, an assignment of benefits can help you circumvent some service fees by limiting the number of transactions or money transfers required to ensure everyone is paid on time.
• Increased peace of mind. Many people don’t like having to constantly think about insurance payouts, contacting their insurance company, or negotiating between insurers and contractors/providers. With an assignment of benefits, you can let your insurance company and a contractor or provider work things out between them, though this can lead to applications later down the road.

Because of these benefits, many recovering individuals, car accident victims, homeowners, and others utilize AOB agreements from time to time.

Risks of Using an Assignment of Benefits

Worth mentioning, too, is that an assignment of benefits does carry certain risks you should be aware of before presenting this contract to your insurance company or a contractor or provider. Remember, an assignment of benefits is a legally binding contract unless it is otherwise dissolved (which is technically possible).

The risks of using an assignment of benefits include:

• You give billing control to your healthcare provider, contractor, or another party. This allows them to bill your insurance company for charges that you might not find necessary. For example, a home improvement contractor might bill a homeowner’s insurance company for an unnecessary material or improvement. The homeowner only finds out after the fact and after all the money has been paid, resulting in a higher premium for their insurance policy or more fees than they expected.
• You allow a contractor or service provider to sue your insurance company if the insurer does not want to pay for a certain service or bill. This can happen if the insurance company and contractor or service provider disagree on one or another billable item. Then, you may be dragged into litigation or arbitration you did not agree to in the first place.
• You may lose track of what your insurance company pays for various services . As such, you could be surprised if your health insurance or other insurance premiums and deductibles increase suddenly.

Given these disadvantages, it’s still wise to keep track of insurance payments even if you choose to use an assignment of benefits. For example, you might request that your insurance company keep you up to date on all billable items a contractor or service provider charges for the duration of your treatment or project.

For more on this and related topic, call Schwartzapfel Lawyers now at 1-516-342-2200 .

How To Make Sure an Assignment of Benefits Is Safe

Even though AOBs do carry potential disadvantages, there are ways to make sure that your chosen contract is safe and legally airtight. First, it’s generally a wise idea to contact knowledgeable legal representatives so they can look over your paperwork and ensure that any given assignment of benefits doesn’t contain any loopholes that could be exploited by a service provider or contractor.

The right lawyer can also make sure that an assignment of benefits is legally binding for your insurance provider. To make sure an assignment of benefits is safe, you should perform the following steps:

• Always check for reviews and references before hiring a contractor or service provider, especially if you plan to use an AOB ahead of time. For example, you should stay away if a contractor has a reputation for abusing insurance claims.
• Always get several estimates for work, repairs, or bills. Then, you can compare the estimated bills and see whether one contractor or service provider is likely to be honest about their charges.
• Get all estimates, payment schedules, and project schedules in writing so you can refer back to them later on.
• Don’t let a service provider or contractor pressure you into hiring them for any reason . If they seem overly excited about getting started, they could be trying to rush things along or get you to sign an AOB so that they can start issuing charges to your insurance company.
• Read your assignment of benefits contract fully. Make sure that there aren’t any legal loopholes that a contractor or service provider can take advantage of. An experienced lawyer can help you draft and sign a beneficial AOB contract.

Can You Sue a Party for Abusing an Assignment of Benefits?

Sometimes. If you believe your assignment of benefits is being abused by a contractor or service provider, you may be able to sue them for breaching your contract or even AOB fraud. However, successfully suing for insurance fraud of any kind is often difficult.

Also, you should remember that a contractor or service provider can sue your insurance company if the insurance carrier decides not to pay them. For example, if your insurer decides that a service provider is engaging in billing scams and no longer wishes to make payouts, this could put you in legal hot water.

If you’re not sure whether you have grounds for a lawsuit, contact Schwartzapfel Lawyers today at 1-516-342-2200 . At no charge, we’ll examine the details of your case and provide you with a consultation. Don’t wait. Call now!

Assignment of Benefits FAQs

Which states allow assignments of benefits.

Every state allows you to offer an assignment of benefits to a contractor and/or insurance company. That means, whether you live in New York, Florida, Arizona, California, or some other state, you can rest assured that AOBs are viable tools to streamline the insurance payout process.

Can You Revoke an Assignment of Benefits?

Yes. There may come a time when you need to revoke an assignment of benefits. This may be because you no longer want the provider or contractor to have control over your insurance claims, or because you want to switch providers/contractors.

To revoke an assignment of benefits agreement, you must notify the assignee (i.e., the new insurance claimant). A legally solid assignment of benefits contract should also include terms and rules for this decision. Once more, it’s usually a wise idea to have an experienced lawyer look over an assignment of benefits contract to make sure you don’t miss these by accident.

Contact Schwartzapfel Lawyers Today

An assignment of benefits is an invaluable tool when you need to streamline the insurance claims process. For example, you can designate your healthcare provider as your primary claimant with an assignment of benefits, allowing them to charge your insurance company directly for healthcare costs.

However, there are also risks associated with an assignment of benefits. If you believe a contractor or healthcare provider is charging your insurance company unfairly, you may need legal representatives. Schwartzapfel Lawyers can help.

As knowledgeable New York attorneys who are well-versed in New York insurance law, we’re ready to assist with any and all litigation needs. For a free case evaluation and consultation, contact Schwartzapfel Lawyers today at 1-516-342-2200 !

Schwartzapfel Lawyers, P.C. | Fighting For You™™

What Is an Insurance Claim? | Experian

What is assignment of benefits, and how does it impact insurers? | Insurance Business Mag

Florida Insurance Ruling Sets Precedent for Assignment of Benefits | Law.com

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Home » Coverage Exclusions » Assignment of Benefits

Assignment of Benefits for Homeowners

• How It Works
• Using Your AOB
• Pros & Cons
• Safe & Secure
• Watch Out for Abuse
• Frequently Asked Questions

An assignment of benefits (AOB) is a contractual agreement that enables a third party to access insurance benefits on behalf of the policyholder.[1] When the policyholder signs an AOB agreement, it grants the third party the authority to initiate an insurance claim and receive reimbursement directly from the insurance company. 

Assignment of benefits for homeowners means that any  contractors , plumbers, or other professionals who perform work to repair your home or property after a claim can work with your insurance provider directly to get compensated. You step aside as the middleman, and they work together.  

While AOB can work with most types of insurance, not every insurance company will allow it. The party performing the work (the insurance claimant) and your insurance company must both agree to the process.

• As the policyholder, you must willingly sign an AOB agreement, giving explicit consent for a third party to access their insurance benefits.
• AOBs may make things easier for both you as the policyholder and for the service provider.
• The service provider takes care of filing the claim, helps the homeowner decide on repairs, and gets paid by the insurance company, relieving you (the policyholder) of having to manage these details.

How Do Assignment of Benefits Work?

AOB is a straightforward process that simplifies insurance billing for both service providers and policyholders. Here is how an AOB works.

Coverage Verified

Before hiring a service provider, the policyholder must make sure that the service is covered by their policy by checking in with the insurance provider. Homeowners insurance pays for the cost of damages or loss due to a covered event, as outlined in the policy. 

Mutual Agreement

The policyholder and the service provider agree to utilize an AOB form.[2] This agreement authorizes the service provider to handle direct billing to the insurance company for the services provided.

Billing Submission

With the AOB form in place, the service provider submits all relevant documentation, including invoices and service records, to the insurance company for payment. In many cases, this includes the initial claim with documentation of the damage and an explanation/proof of how it happened.

Claim Evaluation

The insurance company thoroughly reviews the submitted documents to verify that the damage itself and the provided services are indeed covered under the policy terms and that the contractor provided those same services.

Direct Payment

If the services are eligible and covered by the insurance policy, the insurance company promptly issues payment directly to the service provider. This payment aligns with the agreed-upon costs as outlined in the insurance policy.

Policyholder’s Responsibility

Generally, the policyholder is only responsible for any deductibles, copays, or out-of-pocket expenses specified in their insurance policy.[3] They are relieved of the responsibility of managing the billing process or handling reimbursement paperwork.

Service Rendered

The policyholder receives necessary services covered by their insurance policy, such as medical treatment or repairs.

Example of an Assignment of Benefits

A hurricane hit Rachel’s town, severely damaging the shed where she keeps her tools and lawn equipment. The shed is covered under her home insurance policy, and she files a claim with the insurance provider quickly with photographs and documents that show the damage and provide proof of the value and potential cost to rebuild. The insurance provider approves the replacement of the shed.

To streamline the process of paying the contractor, Rachel signs an AOB allowing the contractor to bill the insurance provider rather than billing her. This means that if there are any disputes about the costs of materials, timeliness of payment, or any other issues, those will happen between the insurance company and the contractor, and Rachel will not be required to step in. 

Additionally, rather than having to pay the contractor out of pocket and wait for a reimbursement check from the provider, the contractor will be paid directly by the insurance company, so Rachel doesn’t have to pay the cost of the shed replacement.

When Would You Use Your Assignment of Benefits?

AOBs can be useful in various situations:

• Assign benefits to contractors for property damage repairs, simplifying the insurance claim process. It can often expedite the process and help claimants to get paid faster.
• AOBs can help in emergencies, ensuring timely payment without paperwork hassles. This can be particularly helpful during already high-stress times. 
• Consider AOBs for complex claims with multiple providers or extensive paperwork. You’ll have less to manage if the parties work together directly.
• You can use an AOB for a range of professionals relating to a homeowners insurance claim, such as plumbers, roofers, window repair specialists, landscapers, carpenters, and restoration specialists.

Pros & Cons of Using Assignment of Benefits

Making Sure Your AOB Is Safe & Secure

To ensure the safety of an AOB:

• Check the reputation of the service provider and seek multiple quotes for services.[4]
• Carefully examine the AOB terms, ensuring clarity and alignment with your insurance policy.
• Beware of high-pressure tactics and take your time to decide.
• Confirm the provider’s licensing and insurance.
• Get multiple estimates in writing for the needed work.
• Consult an attorney or insurance advisor if you have concerns.
• Keep records of communication and contracts.
• Inform your insurer about the AOB and their requirements.
• After services, check the results against AOB terms and your satisfaction.
• Make sure the AOB has appropriate cancellation provisions in place so that you can rescind the agreement in writing in certain circumstances.

Assignment of Benefits Being Abused: What Are My Options?

While an AOB can offer convenience, the process may be susceptible to misuse by those who would take advantage of the insurance company and overcharge for services or claim to have provided services that they did not actually perform. Lisa Koosis, a former claims specialist, warns, “Be watchful for AOB scams, particularly after natural disasters such as earthquakes or hurricanes. Red flags include contractors who offer something for nothing, make exaggerated claims of damage or present broadly worded contracts.”

If you suspect AOB abuse or fraud, consider these options.

Contact Your Insurer 

If you suspect AOB abuse, promptly reach out to your insurance company. Express your concerns and provide any evidence you have to support them. Insurers have units dedicated to investigating potential fraud or AOB misuse.

Report Fraud

If you suspect fraudulent activities, report the issue to your state’s insurance fraud bureau or department, which investigates such cases and takes legal action when appropriate. However, fraud is generally difficult to prove. 

Seek Legal Counsel

Get advice from an  attorney who is experienced in insurance claims to navigate your specific situation. Be aware that pursuing legal action can be costly and lengthy, so it generally won’t be your first course of action. But if the process gets complicated, it’s helpful to have a legal professional on your side. Lisa Koosis, a former claims specialist, says, “If you need legal assistance but can’t afford it, try calling your local law school. Many of them offer free clinics where you can get a consultation and, sometimes, pro bono representation.”

Know About Potential Litigation

If the contractor or service provider isn’t paid by your insurance company, they might pursue legal action against your provider, leading to a dispute that may require your action or response.

Frequently Asked Questions About Assignment of Benefits (AOB) for Homeowners

We have compiled some of the most frequently asked questions about AOBs and how to use them most effectively, so you can make the most informed decisions about your situation.

An assignment of benefits, also referred to as an AOB, in homeowners insurance is when you allow a contractor or service provider to take over your insurance claim process. They deal directly with the insurance company for tasks like repairs or damage assessments and get paid directly. This can simplify and expedite the process because the service provider is dealing directly with your insurance company without you serving as the intermediary. 

All parties must agree to the process. As the policyholder, you’ll sign off on the process, and both the services provider and your insurance company must also agree to the process. 

Using an AOB can be beneficial if it is used wisely and for the purposes of working with reputable service providers. It streamlines claims, but it also comes with potential risks like fraud. Proceed with caution and agree to an AOB only if you feel confident that you are working with trusted parties. Also, be aware that not all insurance companies allow AOBs. Some states prohibit AOBs for certain types of work. Consult your insurance provider to ensure they do before proceeding. 

In recent years, AOBs have been the target of fraud. Some service providers have inflated their invoices, billing for work that wasn’t performed. In some cases, claimants sue the insurance company, resulting in higher premiums for the policyholder down the road.

An AOB simplifies the insurance claims process for policyholders, letting service providers handle the work of getting paid for their services. This reduces responsibility and stress for policyholders and can often serve the best interests of all parties.

An AOB on a claim form is a line item where you authorize a service provider to receive insurance benefits for a specific claim. It lets that provider directly bill and get paid by the insurance company, simplifying the process for you. Make sure to understand the terms before signing it.[2] In some cases, it could mean you are responsible for any fees billed by your service provider if your insurance company doesn’t pay the full amount.

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Assignment of Benefits: Consumer Beware . (April 2020). National Association of Insurance Commissioners.

What is an assignment of benefits?

Jim Probasco is an expert in the areas of personal income, saving and investing, banking, home buying, insurance, and more. A Dayton, Ohio-based writer, Jim has written for radio and television, and authored books for parents in arts education opportunities for their children.

The last time you sought medical care, you likely made an appointment with your provider, got the treatment you needed, paid your copay or deductible, and that was it. No paperwork, no waiting to be reimbursed; your doctor received payment from your insurance company and you both went on with your lives.

This is how most people receive health care in the U.S. This system, known as assignment of benefits or AOB, is now being used with other types of insurance, including auto and homeowners coverage . 

What is an assignment of benefits?  

An AOB is a legal agreement that allows your insurance company to directly pay a third party for services performed on your behalf. In the case of health care, it could be your doctor or another medical professional providing care. With a homeowners, renters, or auto insurance claim, the third party could be a contractor, auto repair shop, or other facility.

Assignment of benefits is legal, thanks to a concept known as freedom of contract, which says two parties may make a private agreement, including the forfeiture of certain rights, and the government may not interfere. There are exceptions, making freedom of contract something less than an absolute right. For example, the contract may not violate the law or contain unfair terms.

Not all doctors or contractors utilize AOBs. Therefore, it’s a good idea to make sure the doctor or service provider and you are on the same page when it comes to AOBs before treatment or work begins.

How an AOB works

The function of an AOB agreement varies depending on the type of insurance policy involved, the healthcare provider, contractor, or service provider, and increasingly, state law. Although an AOB is normal in health insurance, other applications of assignment of benefits have now included the auto and homeowners insurance industry.

Because AOBs are common in health care, you probably don’t think twice about signing a piece of paper that says “assignment of benefits” across the top. But once you sign it, you’re likely turning over your right to deal with your insurance company regarding service from that provider. Why would you do this? 

According to Dr. David Berg of Redirect Health , the reason is simple: “Without an AOB in place, the patient themselves would be responsible for paying the cost of their service and would then file a claim with their insurance company for reimbursement.”

With homeowners or auto insurance, the same rules apply. Once you sign the AOB, you are effectively out of the picture. The contractor who reroofs your house or the mechanic who rebuilds your engine works with your insurance company by filing a claim on your behalf and receiving their money without your help or involvement.

“Each state has its own rules, regulations, and permissions regarding AOBs,” says Gregg Barrett, founder and CEO of WaterStreet , a cloud-based P&C insurance administration platform. “Some states require a strict written breakdown of work to be done, while others allow assignment of only parts of claims.” 

Within the guidelines of the specific insurance rules for AOBs in your state, the general steps include:

• You and your contractor draw up an AOB clause as part of the contract.
• The contract stipulates the exact work that will be completed and all necessary details.
• The contractor sends the completed AOB to the insurance company where an adjuster reviews, asks questions, and resolves any discrepancies.
• The contractor’s name (or that of an agreed-upon party) is listed to go on the settlement check.

After work is complete and signed off, the insurer will issue the check and the claim will be considered settled.

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Example of an assignment of benefits  

If you’re dealing with insurance, how would an AOB factor in? Let’s take an example. “Say you have a water leak in the house,” says Angel Conlin, chief insurance officer at Kin Insurance . “You call a home restoration company to stop the water flow, clean up the mess, and restore your home to its former glory. The restoration company may ask for an assignment of benefits so it can deal directly with the insurance company without your input.”

In this case, by eliminating the homeowner, whose interests are already represented by an experienced insurance adjustor, the AOB reduces redundancy, saves time and money, and allows the restoration process to proceed with much greater efficiency.

When would you need to use an assignment of benefits?  

An AOB can simplify complicated and costly insurance transactions and allow you to turn these transactions over to trusted experts, thereby avoiding time-consuming negotiations. 

An AOB also frees you from paying the entire bill upfront and seeking reimbursement from your insurance company after work has been completed or services rendered. Since you are not required to sign an assignment of benefits, failure to sign will result in you paying the entire medical bill and filing for reimbursement. The three most common uses of AOBs are with health insurance, car insurance, and homeowners insurance.

Assignment of benefits for health insurance

As discussed, AOBs in health insurance are commonplace. If you have health insurance, you’ve probably signed AOBs for years. Each provider (doctor) or practice requires a separate AOB. From your point of view, the big advantages of an AOB are that you receive medical care, your doctor and insurance company work out the details and, in the event of a disagreement, those two entities deal with each other. 

Assignment of benefits for car owners

If your car is damaged in an accident and needs extensive repair, the benefits of an AOB can quickly add up. Not only will you have your automobile repaired with minimal upfront costs to you, inconvenience will be almost nonexistent. You drop your car off (or have it towed), wait to be called, told the repair is finished, and pick it up. Similar to a health care AOB, disagreements are worked out between the provider and insurer. You are usually not involved.

Assignment of benefits for homeowners  

When your home or belongings are damaged or destroyed, your primary concern is to “return to normal.” You want to do this with the least amount of hassle. An AOB allows you to transfer your rights to a third party, usually a contractor, freeing you to deal with the crisis at hand.

When you sign an AOB, your contractor can begin immediately working on damage repair, shoring up against additional deterioration, and coordinating with various subcontractors without waiting for clearance or communication with you.

The fraud factor

No legal agreement, including an AOB, is free from the possibility of abuse or fraud. Built-in safeguards are essential to ensure the benefits you assign to a third party are as protected as possible.

In terms of what can and does go wrong, the answer is: plenty. According to the National Association of Mutual Insurance Companies (NAMICs), examples of AOB fraud include inflated invoices or charges for work that hasn’t been done. Another common tactic is to sue the insurance company, without the policyholder’s knowledge or consent, something that can ultimately result in the policyholder being stuck with the bill and higher insurance premiums due to losses experienced by the insurer.

State legislatures have tried to protect consumers from AOB fraud and some progress has been made. Florida, for example, passed legislation in 2019 that gives consumers the right to rescind a fraudulent contract and requires that AOB contracts include an itemized description of the work to be done. Other states, including North Dakota, Kansas, and Iowa have all signed NAMIC-backed legislation into law to protect consumers from AOB fraud.

The National Association of Insurance Commissioners (NAIC), offers advice for consumers to help avoid AOB fraud and abuse:

• File a claim with your insurer before you hire a contractor. This ensures you know what repairs need to be made.
• Don’t pay in full upfront. Legitimate contractors do not require it.
• Get three estimates before selecting a contractor.
• Get a full written contract and read it carefully before signing.
• Don’t be pressured into signing an AOB. You are not required to sign an AOB.

Pros and cons of an assignment of benefits  

The advantages and disadvantages of an AOB agreement depend largely on the amount and type of protection your state’s insurance laws provide.  

• An AOB frees you from paying for services and waiting for reimbursement from your insurer
• Some people appreciate not needing to negotiate with their insurer
• You are not required to sign an AOB.
• Signing an AOB could make you the victim of a scam without knowing it until your insurer refuses to pay
• An AOB doesn’t free you from the ultimate responsibility to pay for services rendered, which could drag you into expensive litigation if things go south
• Any AOB you do sign is legally binding

The takeaway  

An AOB, as the health insurance example shows, can simplify complicated and costly insurance transactions and help consumers avoid time-consuming negotiations. And it can save upfront costs while letting experts work out the details.

It can also introduce a nightmare scenario laced with fraud requiring years of costly litigation. Universal state-level legislation with safeguards is required to avoid the latter. Until that is in place, your best bet is to work closely with your insurer when signing an AOB. Look for suspicious or inflated charges when negotiating with contractors, providers, and other servicers.

• Our ranking of the best jewelry insurance can help you insure your personal treasures.
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Assignment Of Benefits

What does assignment of benefits mean.

Assignment of benefits (AOB) is the official way an insured person asks their insurance company to pay a professional or facility for services rendered.

Insuranceopedia Explains Assignment Of Benefits

Assignment of benefits is a document that directs payment to a third party at the insured’s request. It becomes legitimate once both the insured party and their insurer have signed the AOB form. AOB is used in a number of insurance contexts, such as paying physicians or clinics through health insurance or paying contractors for repairs through a homeowner’s insurance policy.

Usually, AOBs are issued when the third party pursues it in the hopes that payment from the insurance company will be more certain and delivered more quickly than it would be from the insured.

Related Definitions

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What Is Collateral Assignment of Life Insurance?

Collateral assignment of life insurance designates a lender as the assignee of a policy, granting them the right to part or all of the death benefit until the loan is repaid.

Nathan Paulus

Director of Content Marketing, MoneyGeek

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy. Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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Content Editor

Casie McCoskey is a professional editor passionate about providing people with accessible information on personal finance. Before MoneyGeek, she worked in the legal field, drafting and editing briefs and motions.

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Updated: June 5, 2024

• How It Works
• Overview of Application Process

Pros and Cons

• Impact on Beneficiaries
• Alternatives

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Advertising & Editorial Disclosure

Collateral assignment of life insurance is an arrangement where a policyholder uses the face value of their life insurance policy, which can be a term or permanent life insurance policy, as collateral to secure a loan. If the policyholder dies before they pay off the loan, the lender is prioritized to receive a portion of the death benefit equivalent to the outstanding loan balance. The remaining benefit then goes to the policy's beneficiaries. This agreement ensures that life insurance collateral assignment acts as a safety net for both the lender and the beneficiaries.

• Collateral assignment involves using a life insurance policy as security for a loan, where the lender has a claim on the death benefit if the borrower defaults or passes away before repaying the loan.
• The lender receives priority over the death benefit, which means they are paid first from the policy's payout before any beneficiaries if the loan remains unpaid.
• Various life insurance policies, including term, whole and universal, can be used for collateral assignment, depending on the insurance company's policies and the policy's value.
• If a life insurance policy lapses or is canceled during a collateral assignment, it can breach the loan agreement, potentially resulting in immediate repayment demands.

How Collateral Assignment of Life Insurance Works

The collateral assignment allows you to use your life insurance policy as security for a loan. The process involves legally designating your policy as collateral, which means if you pass away before fully repaying the loan, the lender can claim the death benefit to cover the remaining balance. You start by choosing either a term policy or whole life insurance and then complete a collateral assignment agreement. This agreement is legally binding and sets the terms for the lender to access the death benefit .

For your beneficiaries, the assignment of your life insurance policy as collateral could reduce the death benefit they receive. If you die with an outstanding loan balance, the lender is paid first from the policy's proceeds. Any remaining amount goes to your beneficiaries only after the loan is settled.

For example, a policyholder with a $500,000 policy uses their life insurance as collateral for a $200,000 loan. If the policyholder dies before settling the loan, the lender will receive $200,000 from the policy's death benefit. Meanwhile, the remaining $300,000 gets disbursed to the policy's beneficiaries.

Roles of the Policyholder, Lender and Insurance Provider

Role of the Policyholder

• Ensure consistent premium payments to keep the policy active and in force.
• Inform the lender of any policy changes, such as lapses or surrenders.
• Understand that active management upholds the collateral agreement's integrity.

Role of the Lender

• Accept the life insurance policy as collateral.
• Right to recover owed amounts from the policy's death benefit if the policyholder dies before loan repayment.
• Priority claim on the death benefit, with remaining funds disbursed to beneficiaries.
• Responsible for releasing the assignment after full loan repayment.

Role of the Insurance Provider

• Approve or reject the collateral assignment of the policy.
• Evaluate and ensure compliance with policy terms.
• Officially record the assignment as part of the policy.

Applying for Collateral Assignment

Applying for collateral assignment is a process moderated by your life insurance company designed to secure loans using your life insurance policy as collateral. It involves a series of steps:

Obtain a Collateral Assignment Form

Request a collateral assignment form from your life insurance provider. This form is vital for designating the lender as a collateral beneficiary for the loan amount. Ensure you obtain the correct form, as forms vary based on policy type and insurer.

Fill Out the Form Correctly

Complete the form with accurate details, including policy number, loan amount and lender information. Pay close attention to all sections to avoid errors that could delay or invalidate the assignment. Incomplete or incorrect information can lead to processing delays or rejection.

Sign the Paperwork

Ensure both the policyholder and lender sign the form, confirming the agreement. This dual signature legally binds both parties to the terms of the collateral assignment. Any discrepancy in signatures may question the form's validity.

Submit the Completed Form

Submit the signed form back to the insurance company for processing. Consider using a traceable delivery method for submission to confirm receipt. Delays in submission can impact the timeline of the loan approval process.

Await Approval or Rejection From the Insurance Company

Wait for the insurer to review and approve or reject the collateral assignment. The insurer may request additional information or clarification, which can extend the approval timeline.

Receive a Letter of Acknowledgment

You and your lender will receive a letter of acknowledgment from the insurer if your collateral assignment application is approved.

Obtaining Required Documentation

The required documentation for collateral assignment of life insurance is straightforward. Typically, you'll need to provide two main types of documents for the assignment of a life insurance policy as collateral:

• Collateral Assignment Form: This form is critical because it officially transfers a portion of your life insurance policy benefits to the lender as collateral. It demonstrates to the lender that you have taken the steps to secure your loan against your life insurance policy.
• Original Life Insurance Policy and Proof of Loan: Lenders may require your original life insurance policy to ensure it is valid and enforceable. Proof of the loan agreement or obligation, such as a mortgage note or other loan document, is also commonly required. This establishes the legitimacy of your loan and substantiates the life insurance collateral assignment.

If you need more clarification about documentation requirements, contact your lender to confirm the necessary details to avoid process delays.

Pros and Cons of Collateral Assignment

Using life insurance as collateral can offer a range of benefits and potential drawbacks. Collateral assignment of a policy allows you to secure loans and is often safer than using physical assets as collateral. However, you should also note the inherent risks, primarily that the lender retains the first right to your policy’s death benefit upon your death.

• Lower interest rates on loans.
• Allows you to use the policy and not physical assets as collateral.
• The cash value of your insurance policy continues to grow.
• The lender has the first right to the death benefit.
• Failure to repay the loan can reduce or even eliminate the death benefit.
• Any lapse or cancellation of the policy may lead to violating the loan terms.

Impact of Collateral Assignment on Beneficiaries

While the collateral assignment of life insurance has its benefits, it’s important to remember that it can impact the amount your beneficiaries receive. If you pass away with an outstanding balance on your loan:

Your Lender Will Be Paid First

In the collateral assignment arrangement, the lender is designated as the collateral beneficiary holding the primary claim to the death benefit for the outstanding loan amount. This means if you pass away before fully repaying the loan, the lender is entitled to receive payment from the death benefit first. The amount collected by the lender is limited to the remaining loan balance.

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

After the lender's claim is satisfied, the remaining death benefit is disbursed to your policy’s designated beneficiaries. The amount they receive depends on the loan balance at the time of your death. If the loan balance is substantial, your beneficiaries will receive significantly less than the policy's total death benefit.

This structure underscores the importance of carefully considering life insurance collateral loans and their impact on future financial planning. Policyholders using life insurance as collateral need to understand the terms set forth by loan companies that accept it.

Alternatives to Collateral Assignment

Alternatives to collateral assignment include personal loans , home equity loans or surrendering the life insurance policy for its cash value. None of these options require using life insurance as collateral, and each offers different benefits and risks compared to using life insurance as collateral.

FAQ About Collateral Assignment

These questions cover various topics related to collateral assignments, including their requirements, implications for beneficiaries and what happens in different scenarios.

A collateral assignment is a contractual arrangement in which a borrower uses their life insurance policy as collateral for a loan. This agreement grants the lender rights to the policy’s death benefit. The lender is prioritized over other beneficiaries until the loan is repaid in full.

In the context of a life insurance collateral assignment, the collateral is the policy's death benefit. This setup allows lenders to be listed as collateral beneficiaries, guaranteeing that they can recover the outstanding loan balance from the death benefit in the event of the borrower’s death before the debt is fully paid.

In a life insurance contract, a collateral assignment allocates the policy's death benefit as security for a loan. This means that if the borrower dies before repaying the loan, the lender, as the collateral assignee of the life insurance, can claim the owed amount from the death benefit. The remaining balance, if any, goes to the designated beneficiaries, ensuring the loan is covered without affecting other assets.

Collateral assignment allows a lender to claim the life insurance death benefit for an outstanding loan amount while naming a life insurance beneficiary designated who receives the death benefit. The lender's claim is prioritized over the beneficiaries' in collateral assignment.

Most types of life insurance policies , including term, whole and universal life, can be used for collateral assignment, provided the insurance company allows it and the policy has sufficient value.

Yes, the policyholder can change beneficiaries after a collateral assignment, but the lender's right to the death benefit amount remains until the loan is repaid. This ensures the lender's position as a collateral beneficiary.

Canceling your life insurance policy before repaying the debt can lead to a breach of the collateral assignment loan agreement. This action may prompt the lender to increase your interest rate or demand immediate repayment of the outstanding loan balance.

These related sections offer additional insights into concepts and alternatives connected to collateral assignments and life insurance:

Using Collateral for a Personal Loan — This link explains how to use various types of collateral for securing a personal loan, providing a broader context to the specific use of life insurance as collateral.

Term vs. Permanent Life Insurance — This resource compares term and permanent life insurance, helping to understand which policies can be used for collateral assignments.

Permanent Life Insurance — This page details permanent life insurance, a type commonly used in collateral assignments due to its cash value component.

Life Insurance Calculator — This page helps you calculate the appropriate amount of life insurance coverage needed, which is crucial when considering using a policy for collateral.

About Nathan Paulus

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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Consumer Insight

Sept. 13, 2023

Assignment of Benefits: Consumer Beware

You've just survived a severe storm, or a tornado and you've experienced some extensive damage to your home that requires repairs, including the roof. Your contractor is now asking for your permission to speak with your insurance company using an Assignment of Benefits. Before you sign, read the fine print. Otherwise, you may inadvertently sign over your benefits and any extra money you’re owed as part of your claim settlement.

The National Association of Insurance Commissioners (NAIC) offers information to help you better understand insurance, your risk and what to do in the event you need repairs after significant storm damage.

Be cautious about signing an Assignment of Benefits. An Assignment of Benefits, or an AOB, is an agreement signed by a policyholder that allows a third party—such as a water extraction company, a roofer or a plumber—to act on behalf of the insured and seek direct payment from the insurance company.  An AOB can be a useful tool for getting repairs done, as it allows the repair company to deal directly with your insurance company when negotiating repairs and issuing payment directly to the repair company. However, an AOB is a legal contract, so you need to understand what rights you are signing away and you need to be sure the repair company is trustworthy.

• With an Assignment of Benefits, the third party, like a roofing company or plumber, files your claim, makes the repair decision and collects insurance payments without your involvement.
• Once you have signed an AOB, the insurer only communicates with the third party and the other party can sue your insurer and you can lose your right to mediation.
• It's possible the third party may demand a higher claim payment than the insurer offers and then sue the insurer when it denies your claim.
• You are not required to sign an AOB to have repairs completed. You can file a claim directly with your insurance company, which allows you to maintain control of the rights and benefits provided by your policy in resolving the claim.

Be on alert for fraud. Home repair fraud is common after a natural disaster. Contractors often come into disaster-struck regions looking to make quick money by taking advantage of victims.

• It is a good idea to do business with local or trusted companies. Ask friends and family for references.
•  Your insurer may also have recommendations or a list of preferred contractors.
• Always get more than one bid on work projects. Your adjuster may want to review estimates before you make repairs.

Immediately after the disaster, have an accurate account of the damage for your insurance company when you file a claim.

• Before removing any debris or belongings, document all losses.
• Take photos or video and make a list of the damages and lost items.
• Save damaged items if possible so your insurer can inspect them, some insurance companies may have this as a requirement in their policy.

Most insurance companies have a time requirement for reporting a claim, so contact your agent or company as soon as possible. Your  state insurance department  can help you find contact information for your insurance company, if you cannot find it.

• Insurance company officials can help you determine what damages are covered, start your claim and even issue a check to start the recovery process.
• When reporting losses, you will need insurance information, current contact information and a  home inventory or list of damaged and lost property . If you do not have a list, the adjuster will give you some time to make one. Ask the adjuster how much time you have to submit this inventory list. The NAIC Post Disaster Claims Guide has details on what you can do if you do not have a home inventory list.

After you report damage to your insurance company, they will send a claims adjuster to assess the damage at no cost to you . An adjuster from your insurance company will walk through and around your home to inspect damaged items and temporary repairs you may have made.

• A public adjuster is different from an adjuster from your insurance company and has no ties to the insurance company.
• They estimate the damage to your home and property, review your insurance coverage, and negotiate a settlement of the insurance claim for you.
• Many states require public adjusters to be licensed. Some states prohibit public adjusters from negotiating insurance claims for you. In those states, only a licensed attorney can represent you.
• You have to pay a public adjuster.
• The NAIC Post Disaster Claims Guide has information on the different types of adjusters.

Once the adjuster has completed an assessment, they will provide documentation of the loss to your insurer to determine your claims settlement. When it comes to getting paid, you may receive more than one check. If the damage is severe or you are displaced from your home, the first check may be an emergency advance. Other payments may be for the contents of your home, other personal property, and structural damages. Please note that if there is a mortgage on your home, the payment for structural damage may be payable to you and your mortgage lender. Lenders may put that money into an escrow account and pay for repairs as the work is completed.

More information. States have rules governing how insurance companies handle claims. If you think that your insurer is not responding in a timely manner or completing a reasonable investigation of your claim, contact your  state insurance department .

About the National Association of Insurance Commissioners

As part of our state-based system of insurance regulation in the United States, the National Association of Insurance Commissioners (NAIC) provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers. The U.S. standard-setting organization is governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally.

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Assignment of Benefits for Contractors: Pros & Cons of Accepting an AOB

22 articles

Insurance , Restoration , Slow Payment

When a property owner files an insurance claim to cover a restoration or roofing project, the owner typically deals directly with the insurance company. They may not have the funds available to pay the contractor out of pocket, so they’re counting on that insurance check to cover the construction costs.

But insurance companies often drag their feet, and payments can take even longer than normal. Contractors often wish they could simply deal with the insurance company directly through an assignment of benefits. In some circumstances, an AOB can be an effective tool that helps contractors collect payment faster — but is it worth it?

In this article, we’ll explain what an assignment of benefits is, and how the process works. More importantly, we’ll look at the pros and cons for restoration and roofing contractors to help you decide if an AOB is worth it . 

What is an assignment of benefits? 

An assignment of benefits , or AOB, is an agreement to transfer insurance claim rights to a third party. It gives the assignee authority to file and negotiate a claim directly with the insurance company, without involvement from the property owner. 

An AOB also allows the insurer to pay the contractor directly instead of funneling funds through the customer. AOBs take the homeowner out of the claims equation.

Here’s an example: A property owner’s roof is damaged in a hurricane. The owner contacts a restoration company to repair the damage, and signs an AOB to transfer their insurance rights to the contractor. The contractor, now the assignee, negotiates the claim directly with the insurance company. The insurer will pay the claim by issuing a check for the repairs directly to the restoration contractor. 

Setting up an AOB

A property owner and contractor can set up an assignment of benefits in two steps: 

• The owner and the contractor sign an AOB agreement
• The contractor sends the AOB to the insurance company

Keep in mind that many states have their own laws about what the agreement can or should include .

For example, Florida’s assignment of benefits law contains relatively strict requirements when it comes to an assignment of benefits: 

• The AOB agreements need to be in writing. The agreement must contain a bolded disclosure notifying the customer that they are relinquishing certain rights under the homeowners policy. You can’t charge administrative fees or penalties if a homeowner decides to cancel the AOB. 
• The AOB must include an itemized, per-unit breakdown of the work you plan to do. The services can only involve how you plan to make repairs or restore the home’s damage or protect the property from any further harm. A copy must be provided to the insurance company. 
• A homeowner can rescind an AOB agreement within 14 days of signing, or within 30 days if no work has begun and no start date was listed for the work. If a start date is listed, the 30-day rule still applies if substantial progress has not been made on the job. 

Before signing an AOB agreement, make sure you understand the property owner’s insurance policy, and whether the project is likely to be covered.

Learn more – Assignment of Benefits: Ultimate Guide for Contractors & Policyholders

Pros & cons for contractors

It’s smart to do a cost-benefit analysis on the practice of accepting AOBs. Listing pros and cons can help you make a logical assessment before deciding either way. 

Pro: Hiring a public adjuster

An insurance carrier’s claims adjuster will inspect property damage and arrive at a dollar figure calculated to cover the cost of repairs. Often, you might feel this adjuster may have overlooked some details that should factor into the estimate. 

If you encounter pushback from the insurer under these circumstances, a licensed, public adjuster may be warranted. These appraisers work for the homeowner, whose best interests you now represent as a result of the AOB. A public adjuster could help win the battle to complete the repairs properly. 

Pro: More control over payment

You may sink a considerable amount of time into preparing an estimate for a customer. You may even get green-lighted to order materials and get started. Once the ball starts rolling, you wouldn’t want a customer to back out on the deal. 

Klark Brown , Co-founder of The Alliance of Independent Restorers, concedes this might be one of the very situations in which an AOB construction agreement might help a contractor. “An AOB helps make sure the homeowner doesn’t take the insurance money and run,” says Brown.  

Pro: Build a better relationship with the homeowner

A homeowner suffers a substantial loss and it’s easy to understand why push and pull with an insurance company might be the last thing they want to undertake. They may desire to have another party act on their behalf. 

As an AOB recipient, the claims ball is now in your court. By taking some of the weight off a customer’s shoulders during a difficult period, it could help build good faith and further the relationship you strive to build with that client. 

Learn more : 8 Ways for Contractors to Build Trust With a Homeowner

Con: It confuses payment responsibilities

Even if you accept an AOB, the property owner still generally bears responsibility for making payment. If the insurance company is dragging their feet, a restoration contractor can still likely file a mechanics lien on the property .

A homeowner may think that by signing away their right to an insurance claim, they are also signing away their responsibility to pay for the restoration work. This typically isn’t true, and this expectation could set you up for a more contentious dispute down the line if there is a problem with the insurance claim. 

Con: Tighter margins

Insurance companies will want repairs made at the lowest cost possible. Just like you, carriers run a business and need to cut costs while boosting revenue. 

While some restoration contractors work directly with insurers and could get a steady stream of work from them, Brown emphasizes that you may be sacrificing your own margins. “Expect to accept work for less money than you’d charge independently,” he adds. 

The takeaway here suggests that any contractor accepting an AOB could subject themselves to the same bare-boned profit margins. 

Con: More administrative work

Among others, creating additional administrative busywork is another reason Brown recommends that you steer clear of accepting AOBs. You’re committing additional resources while agreeing to work for less money. 

“Administrative costs are a burden,” Brown states. Insurers may reduce and/or delay payments to help their own bottom lines. “Insurers will play the float with reserves and claims funds,” he added. So, AOBs can be detrimental to your business if you’re spending more while chasing payments. 

Con: Increase in average collection period

Every contractor should use some financial metrics to help gauge the health of the business . The average collection period for receivables measures the average time it takes you to get paid on your open accounts. 

Insurance companies aren’t known for paying claims quickly. If you do restoration work without accepting an AOB, you can often take action with the homeowner to get paid faster. When you’re depending on an insurance company to make your payment, rather than the owner, collection times will likely increase.

The literal and figurative bottom line is: If accepting assignment of benefits agreements increases the time it takes to get paid and costs you more in operational expense, these are both situations you want to avoid. 

Learn more: How to calculate your collection effectiveness 

AOBs and mechanics liens

A mechanics lien is hands down a contractor’s most effective tool to ensure they get paid for their work. Many types of restoration services are protected under lien laws in most states. But what happens to lien rights when a contractor accepts an assignment of benefits? 

An AOB generally won’t affect a contractor’s ability to file a mechanics lien on the property if they don’t receive payment. The homeowner is typically still responsible to pay for the improvements. This is especially true if the contract involves work that wasn’t covered by the insurance policy. 

However, make sure you know the laws in the state where your project is located. For example, Florida’s assignment of benefits law, perhaps the most restrictive in the country, appears to prohibit an AOB assignee from filing a lien. 

Florida AOB agreements are required to include language that waives the contractor’s rights to collect payment from the owner. The required statement takes it even further, stating that neither the contractor or any of their subs can file a mechanics lien on the owner’s property. 

On his website , Florida’s CFO says: “The third-party assignee and its subcontractors may not collect, or attempt to collect money from you, maintain any action of law against you, file a lien against your property or report you to a credit reporting agency.”

That sounds like a contractor assignee can’t file a lien if they aren’t paid . But, according to construction lawyer Alex Benarroche , it’s not so cut-and-dry.

“Florida’s AOB law has yet to be tested in court, and it’s possible that the no-lien provision would be invalid,” says Benarroche. “This is because Florida also prohibits no-lien clauses in a contract. It is not legal for a contractor to waive their right to file a lien via an agreement prior to performance.” 

Learn more about no-lien clauses and their enforceability state-by-state

Remember that every state treats AOBs differently, and conflicting laws can create additional risk. It’s important to consult with a construction lawyer in the project’s state before accepting an assignment of benefits. 

Best practices for contractors 

At the end of the day, there are advantages and disadvantages to accepting an assignment of benefits. While it’s possible in some circumstances that an AOB could help a contractor get paid faster, there are lots of other payment tools that are more effective and require less administrative costs. An AOB should never be the first option on the table . 

If you do decide to become an assignee to the property owner’s claim benefits, make sure you do your homework beforehand and adopt some best practices to effectively manage the assignment of benefits process. You’ll need to keep on top of the administrative details involved in drafting AOBs and schedule work in a timely manner to stay in compliance with the conditions of the agreement. 

Make sure you understand all the nuances of how insurance works when there’s a claim . You need to understand the owner’s policy and what it covers. Home insurance policy forms are basically standardized for easy comparisons in each state, so what you see with one company is what you get with all carriers. 

Since you’re now the point of contact for the insurance company, expect more phone calls and emails from both clients and the insurer . You’ll need to have a strategy to efficiently handle ramped-up communications since the frequency will increase. Keep homeowners and claims reps in the loop so you can build customer relationships and hopefully get paid faster by the insurer for your work.

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Can You Assign Your Insurance Benefits to Someone Else?

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Most business insurance policies contain a so-called anti-assignment clause. This clause prohibits policyholders from transferring any of their rights under the policy to someone else. This means that the insured business cannot cede its right to collect claim payments to another party. However, laws in most states permit policyholders to transfer their rights to another party under certain circumstances.

Anti-Assignment Clause

In the standard ISO policies , the anti-assignment clause is located in a separate form called the Common Policy Conditions. These conditions apply to all coverages that are included in the policy. For instance, if a policy includes business auto , general liability , and commercial property coverages, the anti-assignment clause applies to all three coverages.

The clause is entitled Transfer of Your Rights and Duties Under This Policy. It includes the following provision:

Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.

The anti-assignment clause prohibits the  named insured from transferring any of its rights or obligations under the policy to someone else without the insurer's permission. The only exception is if the named insured is an individual (sole proprietor) and he or she dies. An assignment is permitted in this case because a sole proprietorship and the individual owner are one and the same. If the individual dies, the business cannot survive unless it is sold to someone else.

An anti-assignment clause is intended to prevent the insurer from unwittingly assuming risks it never intended to take on. Commercial insurers review business insurance applicants carefully. Before they issue policies, underwriters consider the knowledge and experience of a company's owners and managerial staff. If a business is sold to someone else, the new owners may not be as skilled or attentive as the previous ones. From the insurer's perspective, the new owners are an unknown risk.

Post-Loss Assignments Permitted

The anti-assignment clause doesn't distinguish between assignments made before a loss and those made afterward. Even so, courts in most states have allowed policyholders to assign their rights to another party after a loss has occurred. Pre-loss assignments are still prohibited. Here is an example of a post-loss assignment of insurance benefits.

Victor operates a restaurant called Vital Vittles out of a building he owns. Late one January night two water pipes in the building freeze. The pipes subsequently burst, causing considerable water damage to Victor's building. Victor is forced to close his restaurant until the repairs are completed.

Victor hires a water damage contractor called Rapid Restoration to repair the damage to his building. He tells the contractor that he needs the repairs done quickly as he is anxious to reopen his restaurant. The contractor says that the repairs can be expedited if Victor signs over his rights under the policy to Rapid Restoration. The contractor will then proceed with the repairs and negotiate a claim settlement with Vital Vittles' commercial property insurer. Victor agrees to the assignment and the contractor begins the repair work.

While Vital Vittles' commercial property policy contains an anti-assignment clause, Victor has assigned his rights to Rapid Restoration after a loss has occurred. Thus, in most states, Victor's insurer cannot reject the assignment (assuming post-loss assignments are permitted in Victor's state).

Problems With Assignments of Benefits

In recent years, assignment of benefits (AOB) agreements have been problematic in some states, particularly Florida. Unscrupulous contractors have preyed on unsuspecting homeowners and business owners who have suffered water damage . Some contractors work alone while others operate in cahoots with crooked lawyers. In either event, the contractor convinces the policyholder to assign his or her rights under the policy over to the contractor. The contractor then exaggerates the cost of the repairs and collects the inflated amount from the insurer. The policyholder is left with a large claim on his or her loss history. When the policy expires, the insurer may refuse to renew it.

In the previous example, Victor has assigned his rights under the policy to Rapid Restoration. Suppose that Rapid Restoration completes only half of the repair work on Victor's building. The actual cost is $15,000 but the contractor submits a bill to the insurer for $30,000. Alternatively, the contractor never submits a bill but sues the insurer for $30,000. In either case, the insurer may refuse to pay on the basis that the contractor has committed insurance fraud. Victor cannot intervene because he has signed his rights over to the contractor. If the contractor is unsuccessful in its lawsuit against the insurer, it may demand payment from Victor's company.

Avoiding Problems With AOBs

As a business owner, you can avoid problems associated with AOBs and unscrupulous contractors by taking the following steps:

• Report any loss or accident directly to your insurer (or your agent or broker ). Notify your insurer immediately. Don't allow a contractor to do the notification on your behalf.
• Take photos of the damage.
• Don't allow any contractor to begin work until an insurance adjuster has documented the damage
• Vet contractors thoroughly before hiring them. Make sure they are properly licensed. If your area has suffered a natural disaster, watch out for construction scams.
• Don't sign an AOB unless you have reviewed it carefully. If you don't understand it, ask your agent, insurer, or attorney for assistance.
• If your contractor won't do any work until you've signed an AOB, find another contractor.

AOBs in Health Insurance

Assignment of benefit agreements are common in health insurance. Patients are often asked to agree to such clauses before they receive treatment from a physician, hospital, or another healthcare provider. The assignment of benefits clause transfers a patient's right to collect benefits under his or her health policy to the provider. By signing the document, the patent agrees that payments will be made directly to the provider for the services rendered. The clause states that the patient is ultimately responsible for the charges if the insurer fails to pay.

Once the treatment has been performed, the provider submits the AOB along with a claim to the patient's health insurer. The insurer pays the provider for services rendered to the patient.

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Insurance claims , medical revenue recovery, what should an assignment of benefits form include.

An assignment of benefits form (AOB) is a crucial document in the healthcare world. It is an agreement by which a patient transfers the rights or benefits under their insurance policy to a third-party – in this case, the medical professional who provides services. This way, the medical provider can file a claim and collect insurance payments. In the context of personal injury protection coverage, an AOB is a critical step in the reimbursement process.

Personal injury protection coverage , or PIP, is designed to cover medical expenses and lost wages incurred after an auto accident, regardless of who is at fault. In New Jersey, drivers are required to carry PIP. Now, let’s say there’s an accident: the driver sees a medical provider for treatment, and the provider bills the patient’s carrier. There is nothing that requires that the insurance carrier to pay the provider. 

This is why an assignment of benefits form is so important. It essentially removes the patient from the equation and puts the medical provider in their place as far as the insurance policy is concerned. This enables the provider to be paid directly. If you see PIP patients and want to be paid directly by the insurer (and avoid claim denials or complex legal situations later) you must get an AOB.

The AOB authorization creates a legal relationship between the provider and the insurance carrier. What should it include?

• Correct Business Entity

Fill out your business name correctly: it seems simple, but this can be a stumbling block to reimbursement. If your business name is Dr. Smith’s Chiropractic Care Center, you cannot substitute Dr. Smith’s, Smith’s Chiropractic, etc.  It must be Dr. Smith’s Chiropractic Care Center. If you have a FEIN number, use the name that is listed on your Health Care Financing Administration (HCFA) form.

• “Irrevocable” 

It is important that you include this term to indicate that the patient cannot later revoke the assignment of benefits. This tells the court that the AOB is the only document determining standing , or the ability to bring a lawsuit on related matters.

Another key term: the court sees benefits as payments. It does not necessarily give you the right to bring a lawsuit. Include language such as, “assigns the rights and benefits, including the right to bring suit…” 

• Benefit of Not Being Billed At This Time for Services

Essentially, this means that a provider gives up the right to collect payments at the time of service in exchange for the right to bring suit against the insurance company if they are not paid in full. Likewise, the patient gives up the right to bring suit, but they do not have to pay now. The wording will look like this: “In exchange for patient assigning the rights and benefits under their PIP insurance, Dr. Smith’s Chiropractic Care Center will allow patients to receive services without collecting payments at this time.”

• Patient Signature 

Yes, it’s basic, but make sure the assignment of benefits form is signed and dated by the patient! This renders the AOB , for all intents and purposes, null and void. It is not an executed contract. You would have to start the entire process again, which means waiting longer to be reimbursed for the claim. 

• Power of Attorney Clause

Including a power of attorney clause, which supports not only “the right of collecting payment” but also the provider’s ability to take legal action on behalf of the patients, is vital. At Callagy Law, we always argue this is inherent within the no-fault statute; however, there are carriers to argue against the right to arbitration when the language is not in the AOB.

As medical providers, it is critical that you receive proper – and timely – reimbursement for services rendered. The assignment of benefits form is one of the most important pieces in this puzzle. It is essential for an attorney to prepare, or at least review, your AOB and other admission paperwork to ensure that you are able to collect pursuant to your patients’ insurance benefits in whatever ways needed. 

Callagy Law can not only review these documents, but also ensure you are pursuing all recoverable bills to which you are eligible. If you have any questions, would like us to review your AOB form, or have issues collecting payment from insurance companies, please contact the Callagy Law team today .

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Assignment of insurance policies and claims

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Post-Loss Assignments of Claims Under Insurance Policies

In the settlement of lawsuits involving insured claims, it is not uncommon that one condition of the settlement is that the defendant assign his or her claims under all applicable insurance policies to the party that filed suit.

Indeed, it is frequently the case that the defendant, particularly when the defendant is an individual, has a limited ability to pay a judgment and insurance coverage offers the best opportunity for a recovery by the suing party. Usually, such settlements are made without any serious thought being given to whether the defendant’s claim against its insurer is assignable; the assumption being that it is assignable.

However, insurance policies generally have anti-assignment clauses which prohibit the assignment of the policy, or an interest in the policy, without the insurer’s consent. These clauses come into play in determining the validity or enforceability of the assignment of a claim under an insurance policy and should be considered when such an assignment is part of a settlement.

When considering the enforceability of anti-assignment clauses in insurance policies, the courts generally draw a distinction between an assignment made prior to the occurrence of a covered loss (a “pre-loss” assignment) and an assignment made after the occurrence of a covered loss (a “post-loss” assignment).

In analyzing pre-loss assignments, the courts recognize that requiring an insurer to provide coverage to an assignee of its policy prior to the occurrence of a covered loss would place the insurer in the position of covering a party with whom it had not contracted nor been allowed to properly underwrite to assess the risks posed by that potential insured, and, accordingly, determine the appropriate premium to charge for the risks being undertaken or choose to decline coverage.

Post-loss assignments, on the other hand, take place after the insurer’s obligations under its policy have become fixed by the occurrence of a covered loss, thus the risk factors applicable to the assignee are irrelevant with regard to the covered loss in question. For these reasons, the majority of the courts enforce anti-assignment clauses to prohibit or restrict pre-loss assignments, but refuse to enforce anti-assignment clauses to prohibit or restrict post-loss assignments.

Katrina Cases

The Louisiana Supreme Court, which had not previously addressed the enforceability of anti-assignment clauses for post-loss assignments, was recently confronted with this issue in the In re: Katrina Canal Breaches Litigation, litigation involving consolidated cases arising out of Hurricane Katrina. The issue arose as a result of a lawsuit brought by the State of Louisiana as the assignee of claims under numerous insurance policies as part of the “Road Home” Program. The Road Home Program was set up following Hurricanes Katrina and Rita to distribute federal funds to homeowners suffering damage from the hurricanes. In return for receiving a grant of up to $150,000, homeowners were required to execute a Limited Subrogation/Assignment agreement, which provided in pertinent part:

Pursuant to these Limited Subrogation/Assignments, the State of Louisiana brought suit against more than 200 insurance companies to recover funds dispensed under the Road Home Program. The suit was removed to Federal Court under the Class Action Fairness Act and the insurers filed motions to dismiss, arguing that the assignments to the State of Louisiana were invalid under the anti-assignment clauses in the homeowner policies at issue.

On appeal, the United States Fifth Circuit Court of Appeals certified the following question to the Louisiana Supreme Court: “Does an anti-assignment clause in a homeowner’s insurance policy, which by its plain terms purports to bar any assignment of the policy or an interest therein without the insurer’s consent, bar an insured’s post-loss assignment of the insured’s claims under the policy when such an assignment transfers contractual obligations, not just the right to money due?”

In answering this question, the Louisiana Supreme Court began by noting that, as a general matter, contractual rights are assignable unless the law, the contract terms or the nature of the contract preclude assignment. Specific to the certified question, Louisiana Civil Code article 2653 provides that a right “cannot be assigned when the contract from which it arises prohibits the assignment of that right.” The Louisiana Supreme Court observed that the language of article 2653 is broad and, on its face, applies to all assignments, including post-loss assignments of insurance claims. The Court, therefore, construed the issue confronting it as whether Louisiana public policy would enforce an anti-assignment clause to preclude post-loss assignments of claims under insurance policies.

In addressing the public policy question, the Louisiana Supreme Court recognized the distinction between pre-loss assignments and post-loss assignments discussed by courts from other states and noted that the prevailing view was that anti-assignment clauses were invalid and/or unenforceable when applied to post-loss assignments. Notwithstanding this weight of authority, the Louisiana Supreme Court stated:

“[W]hile the Louisiana legislature has clearly indicated an intent to allow parties freedom to assign contractual rights, by enacting La. C.C. art. 2653, it has also clearly indicated an intent to allow parties freedom to contractually prohibit assignment of rights. We recognize the vast amount of national jurisprudence distinguishing between pre-loss and post-loss assignments and rejecting restrictions on post-loss assignments, however we find no public policy in Louisiana favoring assignability of claims over freedom of contract.”

Thus, Court refused to invalidate the enforceability of the anti-assignment clauses to the post-loss assignments before it based on public policy, adding that public policy determinations are better suited to the legislature.

Nonetheless, after having recognized the general enforceability of anti-assignment clauses to post-loss assignments, the Court immediately placed limits on when those clauses would be applicable, stating that to be applicable, they “must clearly and unambiguously express that the non-assignment clause applies to post-loss assignments.” The Court refused “to formulate a test consisting of specific terms or words,” which would satisfy this condition and remanded the case to the federal courts to determine whether the individual anti-assignment clauses in the various policies were sufficiently clear and explicit to be enforced with respect to post-loss assignments at issue.

A Broad Application

It should be noted that the Court’s opinion appears to apply broadly to all post-loss assignments irrespective of what specific rights are being assigned, despite the fact that the certified question was narrower and asked only about the applicability of a post-loss assignment where the assignment “transfers contractual obligations, not just the right to money due.”

In a footnote at the beginning of its opinion, the Louisiana Supreme Court observed that in certifying the question to it, the Fifth Circuit “disclaimed any intent” that the Court “confine its reply to the precise form or scope of the legal questions certified.” The footnote indicates that the Court’s opinion was not intended to be limited to only those post-loss assignments involving the assignment of contractual obligations.

Louisiana has departed from the majority view in holding that as a matter of general law, anti-assignment clauses are not inherently void with regard to post-loss assignments. However, it may be that in practical application, the results of individual cases may well be consistent with the majority rule of not enforcing anti-assignment clauses with regard to post-loss assignments because Louisiana courts may be reluctant to find that the anti-assignment clauses are sufficiently “clear and explicit” unless they specifically state that they apply to post-loss assignments, notwithstanding the Louisiana Supreme Court’s unwillingness to “formulate a test consisting of specific terms or words.”

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Absolute Assignment of a Life Insurance Policy

Absolute Assignment means complete Transfer of Rights. The person who transfers the rights is called the Assignor and the person to whom the rights are being transferred is called the Assignee.

The process of transferring rights of a Life Insurance Policy is called Assignment. There are 2 types of Assignment.

• Absolute Assignment
• Conditional Assignment

Hence Absolute Assignment means completely transferring whole and sole rights of the policy from the Assignor to the Assignee without any further terms and conditions applicable.

The process of assignment is complete only when the original Policy Document has been endorsed or a fresh Policy Document has been issued in favour of the Assignee.

Let’s take an example:

Rahul owns a Life Insurance policy of value Rs 5 lakhs. He would like to gift it to his best friend Ajay.

Thus, in that case, he would like to perform Absolute Assignment of the policy in Ajay’s name such that the death or maturity proceeds are directly paid to him. Rahul’s family members or nominee does not have any right on the policy money.

After the assignment is executed, Ajay becomes the absolute owner of the policy. If he wishes, he may again transfer it to someone else for any other reason. This type of Assignment without any further clauses attached to it is called Absolute Assignment.

Example in real life of Absolute Assignment happens in case of an Insurance Policy being taken by the employer as a perquisite for the employee. Once the policy is purchased, it is transferred to the employee’s name under Absolute Assignment clause. Hence the employee becomes the owner of the policy, but the employer pays for it till the end. Thus, instead of paying the employee cash, they purchase an insurance policy in their name and add it to their Annual Income Package.

Deepak Yohannan is the Founder & CEO of MyInsuranceClub. He enjoys writing on Personal Finance and focusses on explaining the basic concepts of insurance in simple language.

• Life Insurance

What Is Universal Life Insurance? Explained

Published: Aug 28, 2024, 4:18pm

Reviewed By

If you’re in the market for a life insurance policy with lifelong coverage, universal life insurance might be the right choice for you. Universal life insurance allows you to tap into the policy’s cash value and will give you the flexibility to adjust your premium payments.

When considering the best universal life insurance policies, make sure you’re working with a trusted financial advisor or experienced life insurance agent. They can be complex.

What Is Universal Life Insurance?

Universal life insurance is a type of permanent life insurance that allows you to adjust your premium payment amounts (within specific parameters).

There are a few types of universal life insurance, and it’s essential to understand the differences before you purchase a policy.

How Does Universal Life Insurance Work?

Universal life insurance—also known as adjustable life insurance—is distinguished by the ability to adjust premium payments. This is a valuable feature if your cash flow is variable. 

Unlike whole life insurance plans that are valid until the policyholder’s death, universal life insurance plans provide flexibility to adjust the death benefit amount. That means you can lower your death benefit if your need for life insurance decreases over time. You may also be able to increase your death benefit amount, but you will likely have to go through further underwriting (questions about your health) to get an increase.

Universal life insurance can be in force for the rest of your life (assuming you make the premium payments).

It typically offers a cash value component. You can withdraw money from the cash value via a withdrawal or policy loan. If you surrender a universal life insurance policy, the coverage ends, and you will receive the cash value minus any surrender charge.

Comparison: Types of Universal Life Insurance

Benefits of Universal Life Insurance

• It can be cheaper than whole life insurance because it doesn’t offer the same guarantees.
• You can vary premium payment amounts and adjust the death benefit amount within certain limits.
• Universal life insurance policies have a cash value component, although some build minimal cash value.
• If you build up cash value, you can make withdrawals or take out a policy loan from your cash value.

Disadvantages of Universal Life Insurance

• It can be hard to understand the distinctive features of different types of ULI.
• Not all universal life insurance guarantees gains on cash value.
• Policy loans and withdrawals deplete your cash value and could cause your policy to lapse without extra premium payments.
• Variable universal life insurance needs to be actively managed because of the underlying sub-accounts.

Guaranteed Universal Life Insurance

Guaranteed universal insurance insurance can be a good choice for someone looking primarily for lifelong coverage and who cares less about the “investment” component of cash value. Unlike other types of universal life insurance, a GUL policy doesn’t offer flexibility with premium payments or death benefit amounts.

• A guaranteed universal life (GUL) insurance policy offers a death benefit and premium payments that will not change over time.
• You’ll generally select the policy’s end date, which should be above 90 years. Choosing a higher age will increase the premium.
• Guaranteed universal life insurance generally has little cash value and is typically the cheapest kind of universal life insurance. You’re paying for the lifelong coverage, not the potential for significant cash value.
• GUL is sometimes called “no lapse guarantee universal life insurance.” This addresses recent problems in which traditional, non-guaranteed universal life insurance policies lapsed because the cash value couldn’t cover the policy’s expenses and insurance cost. Some policyholders who wanted to keep their insurance in force had to pay much larger premiums that they never expected suddenly.
• Newer no-lapse policies promise to stay in force. But there’s a catch: If you make a late payment or miss one, the policy will likely terminate. Since there’s usually little cash value, there won’t be any money to take away. The insurance company will keep the premiums you pay.

Variable Universal Life Insurance

Variable universal life (VUL) insurance allows you to vary premium payments and the death benefit amount within limits. You’ll generally need to manage this kind of policy actively because you’ll select sub-accounts for your cash value investments. You may also be able to choose a fixed interest rate option for cash value as part of your mix of investments.

With variable universal life insurance, you can potentially earn good returns on your cash value (if you’ve invested wisely) and exercise a certain level of control over your investments.

However, your cash value could also tank if the investment choices bottom out. These policies tend to have higher fees than universal life policies and are often more complex.

Who May Benefit From a Variable Universal Life Insurance Policy?

A person who wants to take an active role in choosing the sub-accounts for the policy’s cash value may be attracted to VUL policies. A variable universal life insurance policy would not be a good choice for a person who wants a passive investment or is risk averse.

Who Should Consider Universal Life Insurance?

Consider universal life insurance if you’re interested in being able to adjust your premium payment amounts (within limits).

In addition, life insurance buyers who want the potential to grow cash value at more than a small fixed percentage should consider some forms of universal life insurance. Both indexed and variable universal life insurance offers the potential for more significant cash value accumulation if the underlying investments perform well.

Alternative Types of Life Insurance

• ULIP is a unit-linked insurance plan , a long-term investment instrument that offers advantages of both insurance and wealth creation through investment in equity or debt funds.
• Whole life insurance is generally the most expensive type because of the guarantees within the policy: Premiums are guaranteed not to change, and the cash value has a minimum guaranteed rate of return.
• Term life insurance offers a level premium for a period of 5, 10, 15, 20, 25, or 30 years. It doesn’t have a cash value component, and you can’t adjust the premium payments like you can with universal life insurance. But it’s the cheapest way to buy life insurance.

Frequently Asked Questions (FAQs)

What’s the difference between whole life insurance and universal life insurance.

The key difference between whole life insurance and universal life insurance is that universal life insurance offers more flexibility. With universal life, you can often vary your premium payments and death benefits, while whole life insurance has set premium payments.

But both policies have cash value, and you can add riders to either one.

Should I cash out my universal life insurance policy?

The main reason to cash out a universal life insurance policy is that you no longer need it. But before you take the cash and run, make sure you won’t need life insurance in the future. Life’s circumstances can change, and you don’t want to regret cashing out a policy.

If you need cash now, consider taking a loan against the policy rather than cashing it out. That gives you options in the future, including keeping the life insurance in force.

What happens to cash value in a universal life policy at death?

Cash value in life insurance is really meant to be used during your life. Once you pass away, any cash value generally reverts to the life insurance company. Your beneficiaries get the death benefit, not the death benefit plus cash value. That said, some policies will include cash value in the payout, but this feature is more expensive.

What is the death protection component of universal life insurance?

The death protection component of universal life insurance always ensures that if you die, the insurance company will pay a death benefit to your beneficiaries. It is the death benefit portion of a universal life insurance policy.

What is the difference between indexed universal life insurance and unit-linked insurance plan (ULIP)?

Uniit-linked insurance policies (ULIP) are linked to the performance of investment funds, whereas index-linked policies are linked to the performance of index funds .

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Dipen Pradhan is a Staff Reporter for Forbes Advisor India. He has more than 10 years of experience in journalism. He covers the personal finance beat. When he is not writing, he enjoys documenting the community's ethnic knowledge, and travels to explore rural hotspots.

Aashika is the India Editor for Forbes Advisor. Her 15-year business and finance journalism stint has led her to report, write, edit and lead teams covering public investing, private investing and personal investing both in India and overseas. She has previously worked at CNBC-TV18, Thomson Reuters, The Economic Times and Entrepreneur.