Nomination vs assignment in life insurance policy

Nomination and assignment are the two such terms which a policyholder must be aware of to effectively manage the benefits accruing under a life insurance policy

Assignment of a life insurance policy means transfer of rights from one person to another. The policyholder can transfer the rights of his insurance policy to another for various reasons and this process is called assignment.

The original policyholder who assigns the policy, i.e. transfers the rights, is called the “assignor” and the one to whom the policy has been assigned—the person to whom the policy rights have been transferred—is called the “assignee”. Once the rights have been transferred to the assignee, the assignor has no right on the policy, and the assignee becomes the owner of the policy.

One can usually come across an assignment where the policyholder is trying to use the life insurance policy as collateral against a loan he intends to raise. Assignment must be in writing and a notice to that effect must be given to the insurer.

Assume, Mr X buys a house for which he needs a home loan of Rs. 25 lakh from a bank. Mr X takes a home loan against his policy of sum assured Rs. 25 lakh. To take a loan from the bank, he assigns the policy to that bank, and then the bank would be able to pay out the loan money to him. If Mr X failed to repay the loan, then the bank would surrender the policy and get their money back. The original policyholder will pay the premium before or on the payment due date and not the bank.

In the event of the death of the assignor, the assignee is paid first and the balance (if any) is paid to the policy’s beneficiary. Types of insurance policies used for this purpose usually include an endowment plan, money back policy or a ULIP. Term plans cannot be used in case of assigning a policy.

Nomination vs assignment

While the nomination is an authorisation to receive the policy money in the event of the death of the life assured, it does not give the nominee an absolute right over the money received to the exclusion of other legal heirs. Further, the nomination can be changed any time during the lifetime of the policyholder. On the other hand, assignment of an insurance policy is a transfer or assignment of all rights and liabilities to the insurance policy in favour of the assignee.

Assignment of a life insurance policy

As mentioned earlier, transfer or assignment is a method of transferring ones transferable interest in a life insurance policy to another person or institution including as security for repayment of loans.

Assignment of a life insurance policy may be made by making an endorsement to that effect in the policy document. Another way of transferring or assigning the life insurance policy is by getting a separate assignment deed executed. The former case is a preferred mode of assignment as it is exempt from further stamp duty. An assignment should be signed by the ‘assignor’ or his duly authorised agent specifically stating the fact of transfer or assignment and attested by at least one witness.

The assignee acquires the complete title of the policy and can sue under the policy. He can further assign the policy and can surrender the policy if he so desires. The assignment once effected cannot be cancelled. In case of death of the absolute assignee the rights under the policy delve on the legal heirs of the assignee. It can only be reassigned.

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