When you buy a life insurance policy, you are securing your family’s future financially. But there may come a time when you want to transfer the rights of that policy to someone else. This process is called assignment in life insurance. You can assign a policy to repay a loan or gift it to a loved one, as the process allows the ownership of the policy to be legally transferred. Let’s explore what assignment is in life insurance, how it works, and more.
Understanding Assignment in Life Insurance
Assignment means transferring the rights and benefits of a life insurance policy from the policyholder (assignor) to another person (assignee). After the assignment, the assignee becomes the legal owner of the policy and is entitled to receive the benefits.
A policyholder may consider policy assignment for the following reasons:
- As collateral for a loan from a bank or lender
- As a gift or transfer to a family member
- For estate planning purposes
Once the assignment in life insurance is made, the policyholder loses the right to claim the maturity or death benefits. The insurance company will pay all proceeds to the assignee.
This is different from a nomination, where the nominee only receives the death benefit but does not own the policy.
It is important to note that only the rights and benefits of the life insurance policy are transferred and not the risk associated with it. The policy will continue to cover the risks to the insured.
Now that you know what assignment is in life insurance, let’s look at its types.
Types of Assignment in Life Insurance
Just like there are types of life insurance policies, there are types of assignment in life insurance as well.
Absolute Assignment
In absolute assignment, the policyholder permanently transfers all rights, title, and interest of the policy to another person or institution. This is often done when gifting the policy to a loved one or for estate distribution.
Once the policy is absolutely assigned, the assignor cannot make any further changes or claims on the policy. The assignee becomes the full owner. They are also responsible for making premium payments and carrying out other duties.
Example: A father assigns his life insurance policy to his daughter as a gift. She now owns the policy and will receive all benefits.
Conditional Assignment
Conditional assignment in life insurance is temporary and is subject to certain conditions. It is commonly used when the policy is assigned as collateral to a bank or lender. Once the condition is fulfilled, such as the repayment of the loan, the ownership of the policy reverts to the policyholder.
Example: A salaried professional assigns his policy to a bank as security for a loan. After the loan is paid off, the policy rights return to him.
It is important to inform the insurer and get written confirmation of the assignment in both cases.
How to Assign a Life Insurance Policy?
Assigning a life insurance policy is a simple but formal process.
Step 1. Inform your insurance company about your intent to assign the policy.
Step 2. The insurer will provide you with the required forms and guidelines, along with a list of documents needed for verification.
Step 3. You may then fill out the assignment form carefully with the required details and attach the necessary credentials and documents.
Step 4. Once submitted, the insurance company will review your request, verify the documents, and register the assignment in their records. Approval is granted once all legal and financial checks are completed.
It is also advisable to seek legal or financial advice before proceeding. You can also use tools like a life insurance calculator to estimate the policy’s cost and value. This information can help you decide whether you should go ahead with the decision or not.
Difference Between Assignment and Nomination
Assignment in life insurance is significantly different from the process of nomination. Here's a comparison to show how they differ.
Feature
| Assignment
| Nomination
|
Purpose
| Transfer the ownership of the policy
| Appoint someone to receive death benefits
|
Rights Transferred
| All rights and benefits
| No ownership rights
|
Legal Owner
| The assignee
| The policyholder remains the owner.
|
Is it Revocable?
| Only by mutual agreement (in some cases); in most cases, it is irrevocable.
| Yes, the nominee can be updated/changed any time.
|
So, if you want someone to own the policy, go for assignment in life insurance. If you simply want someone to receive the benefit, consider nominating them.
By understanding what an assignment is in life insurance, you can make the right decision about the ownership of the policy. Always review the terms, understand the impact, and consult your insurer. Whether you are doing it to gift the best life insurance policy to a loved one or to serve as collateral to a bank, assignment ensures your life insurance policy serves more than one purpose.
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