What provision allows a business owner to use their life insurance policy as security for a loan?

The correct answer is that a collateral assignment allows a business owner to use their life insurance policy as security for a loan. This provision enables the policyholder to formally assign a portion of the life insurance policy’s death benefit to a creditor, effectively using the policy as collateral. In the event that the policyholder defaults on the loan, the creditor has a claim to the policy's death benefit up to the amount owed.

This practice is beneficial for both the policyholder and the lender. For the policyholder, it provides a way to secure financing while retaining ownership of the policy, which can continue to provide benefits for the insured’s beneficiaries. For the lender, it reduces risk by ensuring they have a means to recover funds in case of non-repayment.

Understanding how collateral assignments work is particularly important in scenarios involving business loans, where securing financing is often critical for growth and operations. The other options do not provide this specific function—flexible premium relates to the payment structure of a policy, reduced paid-up refers to a nonforfeiture option that allows a policy to continue with reduced benefits, and admitted insurer refers to the licensing status of an insurance company in a particular state. None of these terms apply to the use of life insurance as loan security in