What is the prime objective of buying a Life Insurance Policy?
To provide ‘financial protection to your dependents’. Right?
Then, is it not essential for us to understand who gets our Life Insurance claim, if anything happens to us?
Here comes the role of Nomination and Assignment in Life Insurance.
Let us take the example of my friend who was the sole breadwinner of his family. His wife was not educated enough to hold on to a full-time job. He has two children in school. When he was asking for some investment advice, the first thing I asked him was if he had any insurance policies. He did not understand the concept of insurance.
I had to explain to him how insurance policies work, what a premium is, and the concepts of Nomination and Assignment.
He had the most difficulty understanding the concepts of Nomination and Assignment in life insurance. The following are some of the questions he asked, and the clarifications I gave him.
What do you mean by Nomination and Assignment in life insurance? What is the difference? Are they the same concepts?
Table of contents
1.)Nomination & Assignment – Meaning
2.)Nomination – What You Should Know?
3.)Nomination – Q&A
4.)Assignment – What You Should Know?
5.)Assignment – Points To Remember
7.)Assignment vs. Nomination
1. Nomination & Assignment – Meaning
A Nomination is the act of giving a right to a person or persons to receive the benefit of an insurance policy, in case the original holder expires. In the example of my friend, his wife would be the Nominee. In case he dies, his wife would be eligible to receive the benefits of the insurance policy.
An Assignment is a whole different ball game. It is the act of transferring the rights of an insurance policy to a third party as collateral. In case my friend takes a loan based on his insurance policy, he can use the insurance policy as collateral.
He will ‘Assign’ the insurance policy to the bank. That is, in case he defaults in paying the loan. The bank can enforce the insurance policy and collect the claims on his behalf. This is a typical case of Assignment.
2. Nomination – What You Should Know?
The Nominee for a life insurance policy receives the benefits. So it’s important to pick someone you care about and trust.
It is advised to amend the Nomination to reflect your evolving personal circumstances.
To prevent future disputes or headaches for your loved ones, one must make the necessary adjustments to the policy documentation in the event of a divorce, the death of a Nominee, or the birth of a child.
Please be aware that, in the event of the insured person’s or entity’s death, the insurance company is required to pay the policy profits to the Nominee(s).
Section 39 of the Insurance Act is the regulating section for nominations.
3. Nomination – Q&A
i) What is the difference between a Nominee and a Nomination?
A Nomination is the act of giving a right to a person to receive the claims of an insurance policy after the death of the policyholder.
The person who has been Nominated is called a Nominee.
ii) Is Nomination backed by any section in the Insurance Act?
Yes, this is backed by Section 39 of the Insurance Act. This makes Nomination compulsory.
iii) How many times can you change the name of the Nominee?
The name of the Nominee can be changed as many times as required.
iv) Can you Nominate a minor?
Yes! There can be another person Nominated to hold the claims as a trustee till the minor becomes 18 years of age.
v) What are the rights of a Nominee in Insurance?
A Nominee gets rights over the insurance policy only in the case of the death of the insured. If the insured does not die before the maturity of the policy, the Nomination will stand canceled.
vi) What are the LIC Policy Nominee Rules and Procedures?
The new LIC procedures for Nomination are as follows,
- You can use Form 3750 in LIC to change the Nominee.
- It should be accompanied by proof of relation for the person being Nominated.
- Endorsement of policy bond
- No prior notice to the existing Nominee is required.
4. Assignment – What You Should Know?
An ‘Assignment’ is the act of transferring the rights of an insurance policy to a third party as collateral. If my friend wants to buy a car and has an insurance policy worth 10 lakhs. He can pledge this policy to get the loan at favourable interest rates. This is an Assignment.
Absolute Assignment is when the entire policy, including its rights and ownership to the bank.
A Conditional Assignment happens only if certain rules or regulations mentioned in the contract are violated,
For example, If the contract says there will be an ‘Assignment’ if my friend misses any EMI payment, then this would be called a ‘Conditional Assignment’.
5. Assignment – Points To Remember
- Except for pension plans and the Married Women’s Property Act (MWP), all insurance plans are subject to the Assignment.
- A policy contract endorsement is used to implement the Assignment.
- The risk of the insurance is neither modified nor transferred under the Assignment; only the ownership is. This indicates that the life assured is/will be regarded as the insured.
- Only when the Assignment is made in the insurance company’s favor due to a policy loan may it result in the termination of the Nomination in the policy.
6. Assignment Q&A
i) What do the terms “Assignor” and “Assignee” mean?
The policyholder, who Assigns his right, is known as the Assignor. The Assignee is the person to whom the right is given.
ii) When may a policy be Assigned?
Your insurance policy can be assigned if you want to use it as collateral for a loan, a gift, or a security.
iii) How is a policy Assigned?
You must add an endorsement (see below) to your insurance policy or a separate document in order to allocate it.
iv) When is an insurer allowed to accept the Assignment?
If there is an insurable interest between the Assignor and the Assignee, the insurer might accept your Assignment. The following criteria are typically considered for Assignment:
- Genuinely for the benefit of the policyholder
- Not at odds with the general welfare
- Not to be traded
v) When there are several Assignments, who is entitled to the claim?
If there are multiple Assignments, the sequence in which notices of Assignment were given to the Company will determine whose claims are prioritized.
7. Assignment vs Nomination
|Process||It is accomplished by mentioning the Nominees’ names||It is accomplished by endorsing the policy contract.|
|Policy Amount||If the life assured passes away, the Nominee may get the claim benefits.||The policy money is owed to the Assignee.|
|Suing Rights||The policyholder cannot be sued by the Nominee.||The policy’s Assignee can file a lawsuit against the Assignor.|
|Need For Witness||There is no need for a witness in the Nomination.||The Assignment will be deemed void without a witness.|
|Consideration||Consideration is not supported by Nomination.||Consideration may or may not be supported by the Assignment.|
|Transfer Of Rights||If the life assured dies, it allows the Nominee to claim benefits.||The life assured will Assign all of his or her ownership interests in the policy to another individual or organization.|
|Ownership||The ownership of the insurance remains with the policyholder.||It entails the transfer of ownership rights from the Assignor (the policyholder) to the Assignee (the person or organization).|
We hope that you cleared all your doubts regarding Nomination and Assignment in Life Insurance.
The next time you take a Life Insurance Policy you can go ahead without much worry about who gets your Life Insurance claim if anything happens to you.
Also, What is your view on Nomination and Assignment? Feel free to comment.