What is Assignment in Life Insurance Policy & Its Types?

While purchasing a life insurance plan, you might encounter several unfamiliar terms, which can make this process even harder to follow. However, understanding these terms and their functions is essential to make an error-free decision while handling your policy.

Assignment is one such necessary process associated with life insurance, dealing with the transfer of ownership of your policy. It is often confused with a nomination, which refers to naming beneficiaries of your contract. Therefore, you must understand the aspects of assignment in a life insurance policy.

The transfer of ownership rights from the policyholder to a third party is called an assignment in a life insurance policy. This is frequently done for several purposes, including estate planning, benefit transfers, and loan security. Continue reading to know more about assignments in life insurance policy.

Two other terms related to the assignment process are - assignor and assignee.

• Assignor: An assignor is the one who is transferring their policy rights to someone else.
• Assignee: An assignee is a person or an institution that receives the policy rights and has complete control over them.

In many cases, people who assign their policies to the bank remain the life insured, whereas the bank receives the claim benefit after their demise.

There are multiple purposes for assigning a nominee to a life insurance plan, which are explained below:

• Streamlined Claim Process: Life insurance policy benefits are distributed to a designated individual or entity upon the policyholder's death, providing financial security for dependents and avoiding legal complications.
• Strategic Estate Planning: Assigning a nominee aligns life insurance with estate planning strategies, ensuring specific individuals receive support according to the policyholder's wishes. Policyholders can specify how proceeds should be allocated, allowing flexibility in financial planning.
• Tax Efficiency: Life insurance benefits are tax-free to the nominee, making it tax-efficient to transfer wealth. Nomination helps avoid intestate succession, as assets are distributed according to intestate succession laws.

By assigning a nominee, policyholders can have peace of mind knowing their loved ones will be cared for according to their wishes. This provides a transparent and efficient means of transferring policy benefits.

1. Absolute Assignment

In an absolute assignment, you can transfer your life insurance policy ownership to another being without any terms and conditions. Here, the assignor can sign over the entire policy as a gift to their loved ones or if they owe an outstanding debt.

After the transfer procedure is complete, the assignee will be responsible for all policy-related decisions, including paying the outstanding premiums and designating nominees.

Example of Absolute Assignment

Suppose you have purchased a ULIP plan to secure your family after you pass away. Now, within a few years, you are in need of urgent financing to support your child’s education.

So, instead of surrendering your policy, you can use it as collateral to seek help from someone. Now, you have assigned your insurance plan to a friend (assignee) through an absolute assignment by which your friend can take over all the rights of your policy, including paying future premiums.

Can Absolute Assignment be Revoked?

Absolute assignment of a life insurance policy is irrevocable due to its complete transfer of ownership from the assignor to the assignee. It is a binding legal agreement with no control over the assignor.

Exceptions include a mutual agreement or legal provisions. Absolute assignment should be considered carefully for estate planning, gifting, or business agreements.

2. Conditional Assignment

Condition assignment is a policy where you transfer the life insurance policy rights to an assignee under specific terms and conditions. Therefore, the transfer will only be valid if those conditions are met.

Furthermore, it can also be a temporary transfer, where the policy is transferred back to the assignor once they fulfill the predetermined conditions.

The transfer takes place through a form that mentions the reason and condition of the assignment along with an assigned percentage of the sum assured and who will pay the future premiums.

Example of Conditional Assignment

Suppose you have assigned your life insurance policy under conditional assignment to a bank for which you secured a loan. If you repay the loan within the set time, the bank will transfer the policy rights back to you. However, if you fail to repay the EMIs, the bank can surrender your policy and get their money back.

An assignment is a legal process through which policy ownership transfers from an assignor to an assignee. It can be beneficial under multiple circumstances, especially in a financial emergency. Therefore, before you buy a life insurance plan, understand these features since they can help you in the future.

In addition, the assignment of a life insurance policy can also be used as a present to your loved ones. Nomination is where you directly assign beneficiaries to ensure that your loved ones are protected in your absence.

Issuing a life insurance policy involves transferring credit or ownership rights to another person or entity. The process involves asking your insurance company, obtaining the necessary credentials and documents, filling out a form, and sending information.

The insurance company reviews the paperwork and documents and approves the insurance policy. Providing relevant information and legal and financial advice is an important step. Understanding the implications and reviewing the policy terms can help you successfully issue a life insurance policy to meet your financial goals.

An Example of a Life Insurance Assignment

Vijay is a small business owner living in a city. He uses his ₹2,50,000 life insurance policy as a ₹100,000 loan plan. The insurer provides the collateral assignment, policy documents, and loan agreement.

Vijay signs the form with a licensee, and the insurance company reviews the documents. The bank agrees to the appointment, and he receives a letter of acceptance. Once the loan is repaid, the bank issues its balance on the note. Vijay contacts the insurance company and cancels the transaction, regaining full insurance control.

Enrollment in life insurance is the process by which beneficiaries are selected to receive insurance benefits after the policyholder's death. This ensures that benefits are paid directly to the individual claimants and facilitates claims while obtaining financial security.

Registration is usually done when the plan is purchased and can be renewed anytime. Enrollees are entitled to claim benefits but cannot make policy decisions. Registration is essential for estate planning and ensuring beneficiaries' financial security.

No, nomination is not mandatory in an insurance policy. Nomination is crucial for clear beneficiary designation, simplifying the claims process, providing financial security, and avoiding legal complications. It also prevents disputes, delayed payouts, and unintended beneficiaries.

Insurance companies recommend making nominations during policy purchase, but it is not mandatory. Nominations should be reviewed and updated regularly, and consulting with a financial advisor can help align the policy with estate planning goals.