Understanding Assignment: How Insurance Policy Rights Are Transferred

Definition:

Assignment in insurance means transferring rights and ownership of an insurance policy from the original policyholder to another individual or entity. It can be: Absolute Assignment or Conditional Assignment.

Contents

• What is an Assignment in Life Insurance?
• Key takeaways
• How does an Assignment work in Life Insurance?
• Example of an Assignment in Insurance
• Assignment vs Nomination
• Bottom Line
• FAQs

What is an Assignment in Life Insurance?

An insurance assignment is a legal transfer of policy rights from the policyholder to another person or entity. Depending on the type of insurance assignment- absolute, conditional, or collateral- the assignee may receive full or limited control over the policy.
It can be done to secure a loan or shift ownership, as it transforms a passive policy into an active financial tool. While legally sound, insurance assignment must be executed with precision to avoid applicability issues.

Key takeaways

• Legal transfer of policy ownership from the policyholder to another party is called assignment in insurance. 

• The types of assurance assignments are: absolute assignment, conditional assignment, and collateral assignment.  

• The original policyholder may lose some or all control over the policy in insurance assignment, depending on the type of policy assignment.

• Assignment of an insurance policy is commonly used to offer an insurance policy as collateral for a loan or for transferring ownership.

• The policy assignment is widely recognised under Indian Insurance and Contract law and must be recorded to avoid disputes.

How does an Assignment work in Life Insurance?

In an insurance assignment, the main parties involved are the assignor, the assignee, and the insurer. The original policyholder, known as the assignor, transfers some or all policy rights to another party, known as the assignee. The assignee could be a person or an entity, depending on the purpose of the assignment. The insurance company or the insurer acknowledges and registers the policy assignment. 

There are broadly three types of assignments in insurance:

• Absolute Assignment: A complete and permanent transfer of all rights. E.g., gifting a policy to a spouse or child. The assignor loses all control and claim over the policy, and the assignee becomes the sole policyholder.

• Conditional Assignment: Rights are transferred subject to certain conditions, such as loan repayment. Once the condition is met, rights may revert to the original policyholder. Until then, the assignee holds a limited right to the policy benefits defined in the agreement.

• Collateral Assignment: Conditional transfer of a life insurance policy’s rights to a loan lender as collateral. It doesn’t transfer all the policy rights until the lender holds a limited claim, strictly to the extent of the outstanding loan amount. 

Example of an Assignment in Insurance

Ravi owns a life insurance policy worth ₹50 lakhs. He takes a business loan from a bank and offers the policy as security. To do this, he proceeds a conditional or collateral assignment in favour of the bank. If Ravi repays the loan in full, the assignment is cancelled. However, the bank can recover the outstanding dues from the policy proceeds if the policyholder fails to repay them.
For understanding an absolute policy assignment, consider Meena, who owns a ₹75 lakh policy. She wishes to gift it to her daughter, so she uses an absolute assignment. Once registered, her daughter becomes the legal policyholder and will receive the full payout, regardless of who paid the premiums earlier.

Assignment vs Nomination

Both assignment and nomination involve transferring rights related to an insurance policy; they have different purposes and legal implications.

Bottom Line

An assignment in insurance has a significant role in financial and estate planning. Be it securing a loan or merely giving away the policy, an assignment has some considerable long-term effects. Understanding how assignment operates, as opposed to nomination, can help you ensure the policy accomplishes what it is meant for without legal confusion or future disputes.

FAQs

Below are some of the frequently asked questions on Assignment in Life Insurance

What are the different types of assignments?

The main assignments in life insurance are absolute, conditional, and collateral.

What are the benefits of assignment in life insurance?

Assignment of life insurance is used as a tool for securing loans, transferring assets, or gifting the policy, unlocking cash, securing loved ones, and streamlining succession without any roadblocks. 

What is an assignee in insurance?

An assignee is a person or entity to whom the rights and benefits of an insurance policy are transferred. The person transferring the policy is called the assignor.

How can you assign a policy?

The policyholder or assignor chooses an assignee. The completed form and original policy are submitted to the insurance company. After transfer, only the assignee can pay premiums, borrow against the policy, change nominees, or claim maturity and death benefits from the transfer date, in case of absolute assignment.

To whom can you assign a policy?

Assignment of an insurance policy can be done to another individual or entity, such as a relative, lender, or a financial institution, provided there's an insurable interest

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