Carefully Assign Your Policy

Life insurance policies are long-term contracts. You might start an insurance policy with a lot of zest and vigor and a promise with yourself that you would be paying all the premiums, but you may end up changing your mind mid-way during the term. It may include changing the proposer of the life insurance policy, so that you will be free from paying insurance premiums. You can also avail the benefits of the policy, instead of original nominee. The process by which the original policyholder transfers his rights and benefits to someone else is called ‘assignment’. Assignment facility is provided in all life insurance policies as insurance form a part of estate of policyholder and can be mortgaged, charged, gifted or passed on, with the help of will.

According to Section 38 of Insurance Act, 1938, ‘assignment’ refers to a procedure of transferring rights, interest and title of the policy from ‘assignor’ (original rights’ holder) to ‘assignee’ (new individual). Under assignment, an original policyholder can transfer maturity and death benefits of a policy to assignee.

Assignment entitles change in the proposer, who is the policyholder, and has nothing to do with life assured. Here, partial assignments are not allowed by law. Also, pension policies and policies under Married Women’s Property (MWP) Act cannot be assigned. In case of Children’s Deferred Assurance plans, where children are the life assured and become policyholders after the vesting date, the policy can be assigned by them only after vesting date.

Difference Between Nomination And Assignment

Assignment is often confused with nomination; however, there is a huge difference in both. Under assignment, the full rights to deal with an insurance policy are assigned to another individual; whereas under nomination, a policyholder can change the nominee, depending on his/ her choice, to transfer death benefits.

However, assignment has to be made for a valid reason only. Also nominee can be changed or cancelled during the policy term; whereas assignee cannot be changed, in case of absolute assignment. On the other hand, a policy can be reassigned under conditional assignment.

Also, if nominee dies after the death of life assured and before settlement of claims, the claims will be provided to the heirs of life assured. In comparison to this, if the assignee dies at any time, the policy proceeds will be payable to the heirs of assignee.

Types of Assignment

There are two types of assignments, provided by insurance companies. They are:

1. Conditional Assignment

2. Absolute Assignment

Conditional Assignment

Under this, assignment is only done on the fulfillment of certain conditions or for certain time duration. For instance, in case of loan, the policy can be conditionally assigned in the name of the lender, and will again get transferred back, once the loan is fully repaid.

If the policyholder fails to repay the loan, the bank will hold rights to surrender the policy and recover its money. The leftover, if any, will be paid to original policyholder. An example to conditional assignment is Birla Sunlife.

Here, the nominee will remain same and the left-over proceeds after fulfillment of condition, repayment of loan in this case, will be provided to nominee, in case of death original policyholder’s death. Though, this depends on case-to-case basis, as there are policies, which transfer the nominee rights to assignee in case of conditional assignment, if made to any entity, other than insurer. An example to this is Kotak life insurance.

Absolute Assignment

Under this, the original assignor loses all his rights over the policy, and the same will get transferred to assignee (new policyholder). Also under ‘absolute assignment’, the original nominee gets cancelled and assignee will hold all the rights, including nomination. Here, he can either assigns a nominee or reserves the nominee’s rights to himself.

In case of absolute assignment, along with the rights, liabilities attached to the policy will also get transferred to assignee. Also, once, a policy is assigned with absolute assignment, it cannot be cancelled. It can be done only by another valid re-assignment.

Though in most cases, conditional assignment is done in case loan, but there are some insurers who ask for absolute assignment, e.g., ICICI Prudential, Kotak Life Insurance, etc. Here, in case the loan seeker fails to repay, the insurer holds the right to entire maturity/ death proceeds.

When To Assign Policy?

1. Use assignment when you are no more able to service premiums due to lack of income or change of place, like that of going abroad, etc.

2. Assignment can come handy if you do not want to take a fresh policy with the same person being the life assured. Instead, the rights can be transferred.

3. Use assignment when you want your children to avail tax benefits, instead of you.

4. Assignment is automatically availed while using a policy as collateral security.

5. Conditionally assigning a policy for a valid cause. For example, Bajaj Allianz Life Insurance policies gives you the flexibility of designing the condition, upon the fulfillment of which, the policy will be reassigned.

6. Non-resident policyholders can assign their policies in favour of overseas banks situated in the same country for the purpose of obtaining loans, etc. abroad. Transfer of any claims eventually to the assignee bank will require prior approval of RBI. Assignment can also be used by NRIs for taking loans from India.

When Not To Assignment Policy?

1. When you do not wish to give away your complete control over policy, do not go in for absolute assignment. In case you do so, make sure that the assignee nominates the person, according to your choice.

2. One cannot assign a life insurance policy, in favor of any person, who has resident outside India, without prior approval of RBI, except to spouse or other dependent relative.

Procedure Of Assignment

1. An assignment form has to be filled separately or with the policy itself, as provided by insurer. In case, the assignment is opted for on the policy itself, no stamp duty is necessary; however separate deeds have to be stamped and thus duty will be applicable.

2. The policy document, along with duly filled form and supporting documents including photograph, identity proof, address proof and the other AML (Anti Money Laundering) documents, as required by the company has to be provided. Legal person declaration will also have to be submitted, in case the assignee is a non-individual entity, other than banks and NBFCs.

3. At least one witness is necessary, when the deed of assignment is signed.

Assignment is a flexibility provided to you. It is worth using in terms of passing on your rights to generations, and also of use when you require offering your credit worthiness for fulfillment of a certain condition. Assignment comes handy, when you don’t have enough property for giving as collateral security.