Care To Take While Assigning Your Life Insurance Policy - Outside View by PersonalFN

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Care To Take While Assigning Your Life Insurance Policy
Oct 9, 2019

Life insurance indemnifies risk, provides financial security to your dependents in the case of death, and vital to one's financial wellbeing.

But did you know that life insurance has other benefits as well?

Many are not aware of this but the rights (ownership) of the life insurance policy can be legally transferred to another person or entity. This is better known as assignment of insurance policy. The person who assigns/transfers the policy is known as the `assignor' and the person/entity in whose name the policy is transferred to is known as the `assignee'.

[Read: How To Insure Life Optimally]

There can be various reasons to assign a policy. The policy can be assigned as a gift to someone or used as collateral to avail a loan. The assignment should be in accordance with provisions of section 38 of the Insurance Act, 1938. Assignment can be partial or whole, with or without consideration.

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An assignment can be made by an endorsement (amendments) on the policy document or through a separate assignment deed (stamp duty needs to be paid in this case). In either case, it must be signed by the assignor or his/her duly authorised agent and attested by at least one witness.

It is necessary to inform the insurer about any assignment. The insurer, i.e. the insurance company, may accept the assignment or decline it if it has sufficient reason to believe that it is:

  1. Not bonafide or
  2. Not in the interest of the policyholder or
  3. Not in public interest or
  4. For the purpose of trading of the insurance Policy.

All types of life insurance policies such as term plan, endowment policy, and ULIP (excluding pension plans/annuities) provide the assignment option.

[Read: What should be your check points before buying insurance?]

On completion of assignment, the assignor loses all the rights on the policy. The assignee will be the lone beneficiary of death/maturity benefit of the policy.

An assignor can make more than one assignment. Assignments are prioritised on the basis of the date on which the insurer was notified.

After assignment, the assignee along with being entitled to all benefits under the policy, he/she will be subject to all liabilities and equities under the policy to which the assignor was subject to on the date of assignment.

Once validly executed, the assignment cannot be cancelled or rendered ineffectual by the assignor. In case of death of the assignee, the legal heirs of the assignee will be entitled to the policy benefits.

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Assignment can be absolute or conditional. Absolute assignment is a complete transfer of the ownership of the policy to the assignee without any conditions applicable. The assignee may then, if he/she wishes, transfer the rights to another person or surrender the policy. For example, a person holding a life insurance policy wants to gift the policy to his wife can opt for an absolute transfer.

Conditional assignment can be done when you wish to avail of a loan from an individual or an entity. The transfer of rights will be made once the specified condition is met. If a person wants to avail of a loan from the bank, the insurance policy can be used as collateral. If the policy holder fails to clear the outstanding dues, the bank may surrender the policy kept as collateral to recover the amount.

The bank will be entitled to the benefit post death if the policy holder dies during the tenure of the loan. If the policy holder pays back the loan, the policy can be reassigned to him/her by the bank.

[Read: How Are Life Insurance Claims Handled In Case Of Mysterious Death]

How is it different from nomination?

Nominee is the person to whom the policy holder authorises to receive the policy benefits on his/her demise. The nominee, however, has no rights over the policy as long as the policy holder is alive. The rights of the policy remain with the policy holder and he/she is free to make changes to the nomination.

Besides the nominee does not always have the complete right over the claim proceeds, the legal heirs of the policy holder can also claim the money.

In assignment the rights and interests are immediately transferred. The assignees can deal with the policy as per their wish.

The tax benefits on premiums paid for the life insurance under section 80C of the Income Tax Act can only be claimed by the policy holder or the life insured even if the assignee pays the premium. This is because the policy is not on the life of the assignee. In case the policy is assigned when availing a loan, the premium will have to be paid by the assignor.

Care to be taken while assigning the policy:

  • Make sure your policy is eligible for assignment
  • Follow the procedure as mentioned under the section 38 of the Insurance Act, 1938
  • Take special care when opting for conditional assignment and pay detailed attention to conditions of the assignment. For e.g., what would happen if the outstanding loan amount is lower than the assured benefit, you do not want the assignee to receive more benefits than is due to them.
  • In case of more than one assignee, mention that percentage share of each assignee.
  • If the policy is being assigned to a minor, a guardian must be appointed.

Lastly, make sure that all required documents such as KYC details, stamp duty, original policy document, etc. are well in order.

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Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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