Assignment of Life Insurance

What is Policy Assignment in Life Insurance

Assignment generally means the transfer of ownership of property through a written document, rather than by physical delivery. Ownership includes various rights related to the property, which may belong to one or more individuals. When a life insurance policy is assigned, any previous nomination is cancelled-except when the assignment is made to the insurance company for a policy loan.

Life insurance policy assignment refers to transferring all rights, title, and interest in the policy from one person (the assignor) to another (the assignee). The assignor is the individual who transfers the rights, while the assignee is the recipient.

In India, assignments are regulated by Section 38 of the Insurance Act. Once the assignment is executed, the assignee acquires all rights, title, and interest in the policy, effectively becoming its owner. However, the assignee’s rights cannot exceed those of the assignor. This means that if a claim is denied to the original policyholder, the assignee cannot claim it either. Both parties involved must be legally competent to contract, and there should be no legal disqualifications.

For example :

Mr. X has an ULIP Plan which generally has lockin period of 5 years, he is paid Rs.1 Lakh premium every year for 3 years. Let say current fund value of the policy is Rs. 3.34 Lakhs (13% CAGR, minus charges). If Mr.X wanted money for some emergency if he has to withdraw from ULIP, the Surrender charges would be 10% of Annual Premium i.e. 10% * Rs. 3 Lacs = Rs. 30,000. So If Mr. X wants to withdraw the fund he would get a surrender value, which is Fund value - Surrender charges = Rs. 3.34 Lacs - Rs. 0.3 Lacs = 3.04 Lacs. 

Instead of surrendering he has 2 options. Either get a loan against the ULIP (Asset) or He can sell the plan to some one else. In both cases he has to assign the policy instead of surrendering the policy. Simply put, instead of giving back to the insurer, he is assigning the policy to someone else.

Benefit of Insurance Assignment instead of Surrendering?

Case 1 : Policy Loan vs Surrender 

Instead of surrendering, Mr. X can get a policy collateral loan keeping his life policy as collateral for Rs. 3 Lacs (or lesser as per his requirement, but not more than the fund value) for an interest rate less than 12%. He is better off getting a loan against policy if his returns from the ULIP plan is greater than 12%. But his investment is subject to market risk. In summary, (Market Rate - Interest rate - any charges) would be the % return for Mr.X. In this case : 13% - 11% - 0.5% would be 1.5%. 

Case 2 : Policy Assignment vs Surrender

Instead of surrendering or taking a loan, Mr. X can sell the policy to Mr. Y. In such case Mr. X can assign the policy to Mr.Y at price lower than Fund Value and Higher than Surrender Value. In this case Let say he sells it for Rs. 3.15 Lacs. So Mr. X is selling the policy is benefiting by Rs. 11,000 (Sell value - surrender value i.e. Rs. 3.15 Lacs - Rs. 3.04 Lacs). Mr.Y is benefitting by Rs. 19,000 (Fund Value - Purchase Value i.e. Rs. 3.34 - 3.15 Lacs)

Which Insurance Policies can be Assigned?

All life insurance policies with maturity benefits or surrender value are eligible for assignment, except for term insurance policies, which only provide death benefits and has no surrender value.

Types of Assignments in Insurance

• Conditional Assignment: The policy reverts to the life assured if they survive until maturity or if the assignee passes away.
• Absolute Assignment: All rights, title, and interest in the policy are transferred to the assignee permanently, with no reversion to the assignor or their estate. The assignee has full authority over the policy and can manage it as they wish. Absolute assignments are common in commercial situations, such as when a policy is used as collateral for a loan.

Conditions for a Valid Assignment

1. The assignor must have full rights and title or an assignable interest in the policy.
2. The assignment must be supported by valuable consideration, which can include love and affection.
3. The assignment must not violate any existing laws. For instance, assigning a policy to a foreign national residing abroad may breach exchange control regulations.
4. The assignee can further assign the policy but cannot nominate a beneficiary, as they are not the life assured.

Whole Assignment & Partial Assignment

Following recent amendments to the Insurance Act, a life insurance policy can now be assigned either wholly or partially. In the case of partial assignment, the insurer’s liability is limited to the amount specified in the assignment. The policyholder cannot assign the remaining portion of the policy.

Insurer’s Acceptance

The insurer has the right to accept or reject the assignment and must communicate their decision, along with reasons for any refusal, within 30 days of receiving the assignment notice. If dissatisfied, the policyholder can appeal to the relevant authority.

The rights of assignees established before the latest amendment to Section 38 remain unaffected by these new provisions.