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In summary
A life insurance policy can be assigned when you need to transfer policy rights to another person or entity. Assignment may be used for a loan, debt obligation, asset transfer or another permitted financial arrangement.
- An assignor transfers specified policy rights to an assignee.
- Assignment may be absolute or conditional, depending on the terms.
- Section 38 of the Insurance Act, 1938 governs assignment and transfer of life insurance policies.
- The assignment must be recorded with the insurer before the insurer is required to recognise the assignee's rights.
- A valid assignment generally affects an existing nomination because assignment takes priority under Section 39.
If you are reviewing your life insurance arrangements, you can compare available life insurance options and assess which type of cover suits your financial needs.
What does assignment of a life insurance policy mean?
Why Life Cover Matters
Under Section 38, assignment or transfer is made through an endorsement on the policy or a separate instrument. It must be signed by the assignor or authorised agent and attested by at least one witness. The instrument must set out the required details of the transfer or assignment.
An assignment is not simply a change of nominee. It changes the rights attached to the policy and can affect who is entitled to act in relation to the policy.
What are the different types of assignments of life insurance policy?
Life insurance assignments can be structured in different ways depending on the purpose and terms of the transfer. Following are the different types of assignments of life insurance policy:
| Type | How it works | Common purpose |
|---|---|---|
| Absolute assignment | Rights, title and interest in the policy are transferred to the assignee without a condition for their return | Transfer of policy rights or another permitted arrangement |
| Conditional assignment | The transfer is subject to specified conditions | Loan, debt or another agreed obligation |
| Assignment as security | Policy rights may be assigned to secure an obligation such as a loan | Providing security to a lender |
LIC also describes absolute and conditional assignments and explains that an assignee can subsequently reassign the policy rights to the original assignor.The exact effect depends on the assignment instrument and policy terms. Therefore, you should check the conditions before completing the assignment.
How do you assign a life insurance policy?
Steps to assign a life insurance policy:
- Identify the purpose of the assignment: Decide why you want to assign the policy, such as securing a loan or transferring policy rights to another eligible person or entity.
- Choose the assignee: Identify the person or entity that will receive the assigned policy rights. The assignment document should include the required details about the assignee and the terms of the assignment.
- Complete the assignment document: Assignment can be made through an endorsement on the policy or a separate instrument. The document should state the transfer, its reason and the terms of the assignment.
- Sign and attest the document: The assignor or authorised agent must sign the assignment. At least one witness must attest it.
- Submit the assignment to the insurer: Give the insurer written notice of the assignment along with the endorsement or assignment instrument, or the required certified copy. The assignment does not operate against the insurer until the prescribed notice and document have been delivered.
- Keep the insurer's acknowledgement: The insurer provides written acknowledgement of receiving the notice. Keep this acknowledgement and a copy of the completed assignment documents for your records.
If the assignment is made to secure a loan, the policy can generally be reassigned when the loan obligation is settled, subject to the assignment terms and insurer process. LIC, for example, states that a policy assigned to a financial institution for a loan can be reassigned to the policyholder after repayment.
What should you consider before assigning life insurance?
- Purpose: Clearly identify whether the assignment relates to a loan, debt, asset transfer or another arrangement.
- Rights transferred: Read the assignment terms to understand the rights and responsibilities of the assignor and assignee.
- Policy conditions: Check the policy document for applicable assignment requirements and restrictions.
- Legal and tax implications: An assignment can change control over policy rights and may have tax or legal consequences depending on the arrangement.
- Insurer requirements: Follow the insurer's process for submitting and recording the assignment.
Under Section 38, an insurer may decline to act on an assignment if it has sufficient reason to believe that it is not bona fide, is not in the policyholder's or public interest, or is intended for trading in insurance policies. The insurer must record reasons for refusal and communicate them within the period specified by law.
Who can receive policy benefits through nomination?
Nomination in life insurance allows the policyholder to name one or more persons to receive the policy proceeds in the event of the policyholder's death. Unlike assignment, nomination does not transfer ownership of the policy during the policyholder's lifetime.
A nomination can generally be changed or cancelled in accordance with the applicable legal and policy process. Section 39 of the Insurance Act, 1938 governs nomination, including provisions relating to changing nominations and minor nominees. If the nominee is a minor, the policyholder can appoint another person to receive the policy money on the minor's behalf.
A valid assignment can affect an existing nomination. Section 39 provides that an assignment made in accordance with Section 38 automatically cancels a nomination, subject to the provisions of the law.
What are the different types of nominees?
Nominee Rules and Claim Settlement Explained
| Nominee type | What it means |
|---|---|
| Beneficial nominee | A nominee who may receive the policy proceeds in accordance with the applicable provisions |
| Minor nominee | A nominee below 18 years for whom an appointee may be appointed to receive the proceeds |
| Multiple nominees | More than one person can be nominated, with the policyholder specifying the applicable allocation |
| Contingent nominee | A secondary nominee arrangement that may apply if the primary nominee is not available |
| Non family nominee | A person outside the family may be nominated where permitted, subject to applicable requirements |
The exact rights of a nominee depend on the policy, the applicable law and the circumstances of the claim. Therefore, nomination details should be kept updated with the insurer.
What should you know about nomination and assignment?
Nomination and assignment serve different purposes. Nomination identifies who may receive policy proceeds, while assignment transfers policy rights to another party.
Key points include:
- Nomination can generally be changed: A policyholder can change a nomination during the policy term through the prescribed process.
- Assignment changes policy rights: The assignee receives rights according to the valid assignment.
- Assignment can affect nomination: A valid assignment generally cancels the existing nomination under Section 39.
- Group policies can have nomination provisions: The applicable group policy terms determine how nomination works.
- Nomination and a will are different: A nomination should be reviewed alongside estate planning arrangements where relevant.
LIC also states that nomination can be changed during the lifetime of the policy and that assignment transfers the rights of the transferor to the assignee.
What is the difference between assignment and nomination in life insurance?
| Aspect | Nomination | Assignment |
| Definition | Nomination is the process of appointing a nominee to receive the policy proceeds in case of the policyholder's demise. | Assignment involves transferring ownership rights and benefits of the policy to another party, known as the assignee. |
| Revocability | Nomination can be revoked or changed by the policyholder at any time during the policy term. | Assignment is usually irrevocable, meaning it cannot be reversed without the consent of the assignee. |
| Ownership of policy | The ownership of the policy remains with the policyholder, and the nominee only has the right to receive the proceeds. | The ownership of the policy is transferred from the policyholder (assignor) to the assignee. |
| Purpose | Nomination ensures that the policy proceeds are disbursed to the nominee as per the policyholder's wishes. | Assignment is typically done for specific purposes such as securing a loan, transferring assets, or settling debts. |
Can an assigned policy be reassigned or cancelled?
For example, if a policy was assigned to a financial institution as security for a loan, the policy can be reassigned to the policyholder after the loan is repaid, subject to the applicable process. A conditional assignment can also contain a specified condition under which the assignment is suspended or revoked. Under Section 38 of the Insurance Act, 1938, a conditional assignee cannot take a loan against or surrender the policy while the conditional assignment applies.
Conclusion
Assignment allows a life insurance policyholder to transfer policy rights to another person or entity for a specific financial purpose. It may be used for a loan, debt obligation, asset transfer or another permitted arrangement. Before assigning a policy, understand whether the assignment is absolute or conditional, which rights are being transferred and what responsibilities the assignee will have. A valid assignment can also affect an existing nomination, so the policyholder should review the nomination and assignment together.
If a policy has been assigned as security for a loan, reassignment may be possible after the loan is repaid, subject to the assignment terms and insurer process. Understanding these points can help you complete the assignment correctly and avoid confusion about ownership and policy rights.
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Frequently asked questions
Assignment of life insurance
What is an assignment of life insurance?
An assignment of life insurance refers to the transfer of ownership rights, title, and benefits of a life insurance policy from the original policyholder to another party. This transfer is typically done for various reasons such as securing a loan, transferring assets, or gifting the policy to another individual. The assignee becomes the new owner of the policy and is entitled to receive the policy benefits as per the terms of the policy.
What is the difference between assignment and nomination in life insurance?
Assignment transfers policy rights to another party, while nomination identifies a person who may receive the policy proceeds. You retain ownership when you nominate someone, whereas an assignment transfers rights according to the assignment terms. A valid assignment can also cancel an existing nomination under Section 39 of the Insurance Act, 1938.
What conditions apply to an assignment in life insurance?
The condition of assignment in life insurance refers to the terms and requirements that must be met for the assignment to be valid and legally enforceable. These conditions may include obtaining consent from the insurance company, executing a formal assignment deed, and adhering to any specific requirements outlined in the policy contract or applicable laws.
What is a release of assignment of life insurance policy?
A release of assignment of life insurance policy refers to the cancellation or termination of the assignment arrangement between the original policyholder (assignor) and the assignee. This release may be initiated by the assignor once the conditions of the assignment have been fulfilled, such as repayment of a loan or settlement of debts. Once the release is executed, the ownership rights and benefits of the policy revert back to the assignor, and the assignee's interest in the policy is extinguished.
What is the process of assigning a life insurance policy?
You first identify the purpose and assignee, then complete the required assignment endorsement or instrument. The document must meet the applicable signing and attestation requirements. You then submit the assignment notice and required documents to the insurer. The insurer records the assignment according to the applicable provisions of Section 38.
When would you use an absolute or collateral assignment?
You may use an absolute assignment when you intend to transfer the policy rights to another person or entity. A collateral assignment is generally used when the policy is assigned as security for a loan or debt. The rights transferred and what happens after the obligation is settled depend on the assignment terms and applicable insurer process.
What is the difference between absolute and collateral assignment in life insurance?
An absolute assignment transfers the policyholder's rights, title and interest in the life insurance policy to the assignee. A collateral assignment is generally used to secure a loan or debt, so the assignee receives rights linked to that obligation. Once the loan is repaid, the policy can be reassigned to the original policyholder, subject to the applicable terms and insurer process.
