There are two sets of rights in a life insurance policy: those that exist during the insured�s lifetime and those that arise after the insured�s death. The first set is known, quite logically, as prematurity rights, and the second set as maturity rights. The most important of the prematurity rights are the rights to surrender the policy for cash or paid-up insurance, to borrow against the policy, to designate and change the beneficiary, and to assign the policy. Among the lesser�but still significant�prematurity rights are the rights to elect settlement options, to elect dividend options, to reinstate the policy, to convert or exchange the policy for another, and to take advantage of the automatic premium loan feature. The maturity rights include the rights to receive the proceeds, to elect settlement options (unless usurped by the insured or owner), and to designate direct and contingent beneficiaries (only under certain circumstances).

The concept of ownership of these rights has undergone dramatic development during the last century. The original concept was that all prematurity and maturity rights were vested in the beneficiary and his or her estate. In other words, the beneficiary was regarded as the absolute owner of the policy. Once the insured�s right to change the beneficiary was recognized, the insured and the beneficiary were considered to be joint owners of the prematurity rights and the beneficiary the sole owner of the maturity rights�subject, however, to the right of the insured, if reserved, to divest the beneficiary of all interests in the policy and the proceeds. Over the years this concept has been modified, and today, in the absence of a contrary ownership arrangement, the insured is regarded to be the absolute owner of the prematurity rights and the possessor of the power to dispose of the maturity rights. If the insured has designated a third person as an irrevocable beneficiary, such beneficiary is considered to be the sole owner of the proceeds (when due at maturity), subject to the insured�s reversionary interest, and the insured and the beneficiary are looked upon as the joint owners of all prematurity rights.

Ever since the concept of a beneficiary change was recognized around the turn of the century, the insured has been identified with ownership rights, either as sole or as joint owner. The most recent development is the insured�s complete dissociation or disattachment from ownership rights in the policy. This development received its impetus from the growth of business insurance, juvenile insurance, and insurance for estate-transfer purposes, where there is a distinct need to have ownership of the policy in a person other than the insured, but it was also motivated by insurers� desire to clarify the ownership status of the various rights in the contract.

Dissociation is accomplished by specifying on the face of the policy that a particular person or firm is the owner of the policy and restricting the exercise of the various policy rights and privileges to the owner. In most cases the insured is designated as owner, but the insured, as such, has no rights in the policy. All prematurity rights are vested in the owner, including the right to control the disposition of the maturity rights. The owner is given express authority to designate and change primary and contingent beneficiaries. Furthermore, during the lifetime of the insured, the owner can exercise all the rights and privileges in the policy without the beneficiary�s consent. The application for the policy makes no reference to the question of whether the applicant does or does not reserve the right to change the beneficiary. If the applicant wishes to create a joint ownership of the policy by the insured and the beneficiary, he or she can designate them as joint owners, with whatever survivorship provisions might be appropriate or desired.

The owner is given the sole right to assign the policy, and the interest of any beneficiary is made subject to the assignment. The assignee, however, does not necessarily become the owner of the policy. The policy may stipulate the manner in which a transfer of ownership is to be accomplished, and some policies state that ownership of the policy can be transferred only by a written instrument, satisfactory to the company, endorsed on the policy.

It can be seen therefore that a minimum of five parties other than the insurance company may be associated with a life insurance policy: the applicant, the insured, the owner, the beneficiary, and the assignee. In the great majority of cases, the applicant, insured, and owner are one and the same person. Nevertheless, the ownership of all rights and privileges is crystal clear, irrespective of the number of parties or interests involved. The next problem is to determine what happens to these rights and privileges when the policy is assigned.

A collateral assignment is nothing more than a pledge, subject to the general rules of law governing such a transaction. A pledgor is entitled to get his or her property back upon paying the debt when due and after tendering the correct amount at the proper time, may recover the property in a legal proceeding. On the other hand, if the debt is not paid when due, the pledgee may, under authority of a court obtained in a suit for that purpose�or more commonly under the authority of the pledge agreement itself�sale can be private if the agreement gives the pledgee that alternative. The surplus remaining after the pledgee has been satisfied belongs to the pledgor.

Pledging a life insurance policy as collateral for a debt raises some additional issues. Since the pledgee is not the absolute owner of the policy, he or she cannot surrender the policy in the absence of a specific agreement to that effect. If the pledgor of an insurance policy dies before paying the debt for which the policy is security, the pledgee has a claim against the policy proceeds and may enforce that claim to the extent of the debt and other related charges. However, since the collection of the proceeds is not a sale, the pledgee does not have the power, in the absence of an express stipulation, to collect the full amount of the proceeds, holding the excess for the pledgor�s representatives.

It was not customary before the development of the American Bankers Association (ABA) assignment form for collateral assignment forms to confer specific rights and powers in the policy on the assignee. When the assignee attempted to surrender a pledged policy or to take other action concerning it, most companies insisted that the owner of the policy join in the action. Furthermore, upon maturity of the policy, the assignee was permitted to collect only the amount of the outstanding indebtedness, unpaid interest, premiums paid on the policy, and other expenses incurred in connection with the loan. The remaining portion of the proceeds, if any, was paid to the beneficiary of record.

Many creditors resented having to prove the extent of their interest to the insurance company, preferring to receive the entire amount of proceeds and to account to the beneficiary for the excess over their claims, as they computed them. To make matters worse, the collateral notes (not the collateral assignment form) used by some banks proved to be defective, in that they failed to give the bank the unquestioned right to pay premiums on the policy in the event of the insured�s default and to add the sums thus paid to the principal of the indebtedness. The bank�s only recourse in some circumstances was to obtain title to the policy through foreclosure proceedings, thus establishing its right to pay premiums and to bring these payments under the protection of the collateral assignment. To obviate such difficulties, the ABA assignment form contains a provision that specifically authorizes the assignee to pay premiums and to add them to the amount of the indebtedness.

Whatever the impact of a collateral assignment on ownership rights, it is intended to be temporary in nature. As started earlier, once the loan is repaid by the assignor, the assignment is released and all ownership rights revert to their status before the assignment. An irrevocable beneficiary, for example, in joining in a collateral assignment, does not relinquish any vested rights in a policy; he or she merely agrees to subordinate his or her interest to that of the assignee during the time the assignment is in force. Once the assignment is terminated, the former status of all rights is restored. Repayment of the loan cancels the assignment, even though there may not be a formal release of the encumbrance.

An absolute assignment conveys all the title, rights, and interests possessed by the assignor to the assignee. If the assignor owned all the rights in the policy, or if all persons having an interest in the policy joined in the assignment, the assignee becomes the new owner of the policy and can exercise all the rights therein without the consent of any other person. The transfer is intended to be permanent.

This was the conventional way of transferring ownership of a policy to another person. It was used, for example, when the insured wanted to make a gift of the policy or, on rare occasions, to sell the policy. It was the approved method of divesting the insured of all incidents of ownership in a policy, to the end that the proceeds would not be includable in his or her gross estate for federal estate tax purposes. Transferring ownership rights by means of an ownership endorsement is also used. Under this method and as specifically stated in the policy, ownership in the full legal sense can be transferred only by means of a written instrument, acceptable to the company, endorsed on the policy.

In the days when an absolute assignment was universally regarded as a full and complete transfer of ownership rights, many creditors�particularly banks�turned to it as a more effective method than collateral assignments of safeguarding their interests. They began to insist on an absolute assignment when a policy was being pledged as security for a loan. In this way, they hoped to avoid the restrictions that were frequently imposed on them in connection with collateral assignments. They wanted the right, without the consent of the insured, to surrender the policy for cash, to borrow the loan value, to elect paid-up insurance, and to exercise any of the other rights and privileges that might protect their interests. They also wanted the right to receive the full proceeds upon maturity of the policy, from which they would deduct amounts due them and pay over the excess to the insured or the beneficiary, as the case might be. In so doing, of course, they would deprive the beneficiary of the privilege of utilizing the policy�s settlement options. In most cases, because of the smallness of the sums involved, this was not a serious disadvantage to the beneficiaries. When the sums involved were substantial and the options were favorable, however, this practice was a potential source of great loss to the beneficiaries.

In many cases, perhaps, the absolute assignment form worked out exactly as the banks and other creditors had hoped it would. In other cases, however, the insurance company, realizing that the intent was that the policy had been assigned only as collateral, refused to recognize the assignee as sole owner of the policy and insisted upon the insured�s joinder in the exercise of the various policy rights. Insurers based their refusal on the failure of the assignment form to mention the specific rights conferred upon the assignee.

Dissatisfaction of both creditors and debtors with the absolute assignment form eventually led to the development of a form especially designed for the assignment of life insurance policies. It was developed by the Bank Management Commission of the American Bankers Association with the collaboration of the Association of Life Insurance Counsel. The official name of the form is "Assignment of Life Insurance Policy as Collateral," but it is popularly known as the ABA assignment form.

The essence of the ABA assignment form is that it sets forth clearly and specifically the rights that are transferred to the assignee and the rights that are not transferred and are presumably retained by the assignor. The assignment is absolute and unqualified in the sense that the rights vested in the assignee can be exercised without the consent of any other party. It is collateral in that the assignee�s rights are limited to his or her interest, with all rights reverting to the assignor upon termination of the assignee�s interest.

The form states that the following rights will pass to the assignee, to be exercised by him or her alone:

The insurance company is authorized to make payment to the assignee without investigating the reason for any action taken by the assignee, the validity or amount of the assignee�s claims, or the existence of any default on the assignor�s part. Upon surrender or maturity of the policy, the assignee is entitled to all the monies due but may, at his or her option, request a smaller sum. From the standpoint of the assignee, the right to receive the full proceeds eliminates one of the objections to the collateral assignment, but the assignee may also permit the proceeds in excess of his or her claims to be paid under the settlement plan selected by the insured. If the assignee requests the payment of a greater sum than the amount of the assignee�s interest, he or she becomes what in law is known as a resulting trustee for the excess and must account under the principles of trusteeship to the insured or beneficiary, as the case may be, for such sum. In this connection, it is pertinent to observe that bank assignees tend to be reluctant to invoke their right under the ABA assignment form to collect more than their claim upon maturity of the policy. They prefer to avoid the responsibility of determining who under the policy language is entitled to the remainder of the proceeds.

The assignee is relieved of the obligations to pay premiums and policy loan principal or interest. If the assignee does pay any such items out of his or her own funds, the amounts so paid become part of the liabilities secured by the assignment, are due immediately, and draw interest at a rate not exceeding 6 percent annually until paid.

Other provisions of the form establish the superiority of the assignment instrument in case of conflict with any provisions of the note for which it is security, grant administrative discretion to the assignee in handling a claim, and certify that the assignor has no bankruptcy proceedings pending against him or her and has not made an assignment for creditors.

Until recently, the ABA form was the most widely used of all such forms. It no longer enjoys such popularity because differing requirements in various states make the ABA form inappropriate in some jurisdictions. In its place some insurers have prepared their own collateral assignment forms that are tailored to the varying state requirements. Policyowners should always seek the advice of competent local counsel when they intend to make a collateral assignment of a life insurance policy.

If the interest of an assignee is to be protected, the insurance company must be notified of the assignment, preferably as soon as the assignment has been executed. A life insurance policy is not a negotiable instrument; a transfer of rights in the policy, to be effective, must be recorded with the party who is under obligation to perform. If, without notice of an assignment, a life insurance company, upon maturity of a policy, pays the proceeds to the beneficiary of record, it will be absolved under the general rules of law from any further liability or obligation under the policy, even though a valid assignment of the policy was in effect at the date of the insured�s death. To implement the law and to put all parties on notice, insurers incorporate a statement in their policies that no assignment will be binding on the company unless it is in writing and filed in the home office. This provision has no effect on the validity of an assignment, but it has a material bearing on the enforcement of the rights transferred to the assignee.

The issue is broader than the rights of the beneficiary and the assignee. At the maturity of the policy, there may be more than one valid assignment of the policy in effect, and the relative rights of the assignees must be resolved. This can happen when one of the assignees failed to demand delivery of the policy with the assignment or when the insured obtained a duplicate copy or copies of the policy by alleging that the original had been lost. Although it is conceivable that an insured could innocently or inadvertently assign a policy while a valid assignment of the policy was still outstanding, in most such cases the insured is guilty of fraudulent behavior.

Definite rules of law have evolved to settle disputes arising over multiple assignments of the same interest. The English rule, adopted in a minority of American jurisdictions, holds that the assignee who first gives notice to the insurance company has prior claim to the proceeds, provided that such assignee, at the time the policy was assigned to him or her, had no notice of a prior assignment. If the assignee did know of an earlier unrecorded assignment still in effect, he or she would, of course, have been guilty of fraud in accepting a second assignment of the same interest.

The American�or prevailing�rule is that the assignee who is first in point of time will be preferred, regardless of notice to the company. This rule is subject to the important exception that if the prior assignee fails to require delivery of the policy and thus permits a subsequent assignee to obtain delivery of the policy with no notation of the prior assignment, the subsequent assignee�s claim will be superior to that of the original assignee.

A third general rule, applicable under either the English or American rule, is that an assignee not guilty of fraud will be permitted to retain any proceeds that may have been paid to him or her. Thus an assignee with a preferred claim will lose his or her priority in any jurisdiction if that assignee fails to notify the insurer of the claim before the company has paid another assignee of record. In jurisdictions applying the American rule, the assignee first in point of time will have his or her interest protected even under the general rule as long as the assignee records the assignment with the insurance company at any time prior to payment by the company.

Policy loans or advances made by the insurer are subject to the foregoing rules. Since assignments involving policy loans or advances are automatically recorded with the company, no difficulties are likely to develop around them. The only time that an insurer would find its lien against the cash value and proceeds subordinate to that of another assignee would be if�-with notice of another valid assignment and without the consent of the assignee�-it went ahead and made a policy loan. Presumably, this would happen only through inadvertence. If a valid assignment of the policy had been executed prior to the policy loan but with no notice to the insurer, the company would be protected under the exception to the American rule.

Whenever there are conflicting claims for insurance proceeds or other benefits, whether the claimants are assignees or beneficiaries, the insurance company generally seeks the assistance of the courts. To do otherwise would be to invite the possibility of having to pay the benefits more than once. In such circumstances, the insurer files a bill of interpleader, an equitable device, and pays the proceeds into court. In taking such action, it admits its obligation to pay and petitions the court to adjudicate the conflicting claims and determine who is entitled to receive the money. The insurer discharges its responsibility by paying the disputed sum over to the court. This is an extremely important legal remedy for insurance companies.