This is a very common question among business owners applying for a bank loan. Let's look at an example.
Bob wants to borrow $2 million from his local bank, to expand his business. His banker agrees to lend him the money, but wants to have life insurance in place on Bob's life. Why? Because if Bob tragically dies before the loan is paid off, his banker doesn't want to have to chase his wife or his estate for the money.
So, the race is on for Bob to get a policy. He wants that coverage quickly so he can close the loan and get his money. He gets prequalified for coverage, finds a company that will give him good underwriting, and submits an application. The application is approved, the policy is delivered, he pays for it, and the coverage is put into force.
Now he is ready to execute a collateral assignment. He gets a form from his bank, or from the insurance company – whichever the bank prefers – and completes it. His wife is the beneficiary, and the bank is the assignee. He gets the money from the bank and sinks it into his business.
Now let's suppose he unfortunately meets his demise a year later. His wife files a claim. The claims department of the insurance company pulls the file and notices that the benefit has been collaterally assigned to the bank. They contact the bank and ask for documentation of any outstanding balance on the loan. The bank provides this, gets paid, and then Bob's wife gets the rest of the death benefit.
The use of a collateral assignment makes sure the lender gets paid only what they are due. If the bank had been made the beneficiary, they would've been given the full death benefit, even if some of the loan had already been paid off. They would've been overpaid, and Bob's wife would've been given nothing.
If you are applying for life insurance to secure your own business loan, remember that there is no reason to make the lender the beneficiary. Use a collateral assignment and make sure your broker walks you through its execution.
Please feel free to contact me with additional questions.
Insurance is a contract between the insurance company (insurer) and you (policyholder). It is a contract with full of jargon. As much as possible, we must try to understand all the insurance terms mentioned in the policy bond (certificate). One such insurance jargon which is mostly used is Assignment.
If you are planning to apply for a home loan, your home loan provider may surely use this term. So, what is Assignment? Why assignment of a life insurance policy is required? What are different types of assignment? What are the differences between Assignment & Nomination?
What is Assignment?
Assignment of a life insurance policy means transfer of rights from one person to another. You can transfer the rights on your insurance policy to another person / entity for various reasons. This process is referred to as ‘Assignment’.
The person who assigns the insurance policy is called the Assignor(policyholder) and the one to whom the policy has been assigned, i.e. the person to whom the policy rights have been transferred is called the Assignee.
Once the rights have been transferred from the Assignor to the Assignee, the rights of the policyholder stands cancelled and the assignee becomes the owner of the insurance policy.
Assigning one’s life insurance policy to a bank is fairly common. In this case, the bank becomes the policy owner whereas the original policyholder continues to be the life assured on whose death the bank or the policy owner is entitled to receive the insurance money.
Types of Assignment
The assignment of an insurance policy can be made in two ways;
- Absolute Assignment– Under this process, the complete transfer of rights from the Assignor to the Assignee will happen. There are no conditions applicable.
- Example: Mr. PK Khan owns a life insurance policy of Rs 1 Crore. He would like to gift this policy to his wife. He wants to make ‘absolute assignment’ of this policy in his wife’s name, so that the death benefit (or) maturity proceeds can be directly paid to her. Once the absolute assignment is made, Mrs. Khan will be the owner of the policy and she may again transfer this policy to someone else.
- Conditional Assignment – Under this type of assignment, the transfer of rights will happen from the Assignor to the Assignee subject to certain conditions. If the conditions are fulfilled then only the Policy will get transferred from the Assignor to the Assignee.
- Example: Mr. Mallya owns a term insurance policyof Rs 50 Lakh. He wants to apply for a home loan of Rs 50 Lakh. His banker has asked him to assign the term policy in their name to get the loan. Mallya can conditionally assign the policy to the home loan provider to acquire a home loan. If Mallya meets an untimely death (during the loan tenure), the banker can receive the death benefit under this policy and get their money back from the insurance company.
- If Mallya repays the entire home loan amount, he can get back his term insurance policy. The policy would be reassigned to Mallya on the repayment of the loan.
- In case if the death benefit received by the banker is more than the outstanding loan amount, the insurer will pay the bank the outstanding dues and pay the balance to the nominee directly. The balance amount (if any) will be paid to Mallya’s beneficiaries (legal heirs / nominee).
How to assign a life insurance policy?
The Assignment must be in writing and a notice to that effect must be given to the insurer. Assignment of a life insurance policy may be made by making an endorsementto that effect in the policy document (or) by executing a separate ‘Assignment Deed’. In case of assignment deed, stamp duty has to be paid. An Assignment should be signed by the assignor and attested by at least one witness.
Downloadabsolute assignment deed sample format / conditional assignment deed format.
Download‘application for assignment’ sample format.
Nomination Vs Assignment
Nomination is a right given to the policyholder to appoint a person(s) to receive the death benefit (death claim). The person in whose favor the nomination is effected is termed as ‘nominee’. The nominee comes into picture only after the death of the life assured (policy holder). The nominee will not have the absolute right over the money (claim proceeds). The other legal heirs of the policy holder can also recover money from the nominee.
(However, as per Insurance Laws (Amendment) Act, 2015 – If an immediate family member such as spouse / parent / child is made as the nominee, then the death benefit will be paid to that person and other legal heirs will not have a claim on the money)
Under nomination, the rights of the policyholder are not transferred. But, assignment is transfer of rights, interest and title of the policy to some other person (or) entity. To make assignment, consent of the insurer is also required.
- Assignment of policies can be done even when a loan is not required or for some special purposes.
- If you assign the policy for other purpose other than taking a loan, the nomination stands cancelled.
- If the policy is assigned, then the assignee will receive the policy benefit. Death benefit will be paid to the Nominee, in case the policy is not assigned.
- The policy would be reassigned to you on the repayment of the loan (under conditional assignment).
- Types of insurance policies used for assignment purpose to get business loans, generally include an endowment plan, money back policy or a ULIP. Home loan providers generally ask for the assignment of Term insurance plans on their names. (The term plan tenure should be more than the home loan tenure)
- An assignment of a life insurance policy once validly executed, cannot be cancelled or rendered in effectual by the assignor. The only way to cancel such assignment would be to get it re-assigned by the assignee in favor of the assignor.
- You can also raise a loan against your policy from your insurance company itself. In this case, your policy would have to be assigned to insurance company.
- An insurer may accept the assignment or decline.(The insurer shall, before refusing to act upon the endorsement, record in writing the reasons for such refusal and communicate the same to the policy-holder not later than thirty days from the date of the policy-holder giving notice of such transfer or assignment)
- In case of death of the absolute Assignee (to whom the policy rights have been transferred under absolute assignment), the rights under the policy will be transferred to the legal heirs of the assignee.
- You can also assign a life insurance policy underMarried Women’s Property Act. (At the time of making the application (buying a policy), a separate MWPA form has to be filled by the proposer for it to be covered under MWP Act. Do note that the existing life insurance policies cannot be assigned under MWP Act)
- Partial assignment or transfer of a policy can also be made. But banks will accept any of your life insurance policies as long as the sum assured is equal to or greater than the loan amount.
Hope you find this post informative and do share your comments.
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