A policyholder (assignor) who is the owner of the insurance policy on his own life can assign the policy to another person(assignee). Assignment means the complete legal transfer of ownership of the policy, the policyholder will lose all control on the insurance policy, and it will no longer be his property. Once the assignment is made by the policyholder, he cannot be changed or cancel the assignment. The policy after assignment will become the property of the assignee. Assignment of the policy cannot be made by the nominee of a policy. Insurance Act 1938 in India-Section 38 governs the assignment of the insurance policy.
An assignment is done for the purposes like:
1. As collateral to the bank for the purpose of raising a loan or
2. To gift it to policy holder’s dear ones- relative/s or friend/s.
When a policy is assigned to someone by the policyholder, it will become the assignee’s property whether the policyholder is alive or dead; if it is a maturity or death benefit, the assignee alone will get all the policy money from the insurance company.
Even after assignment, the life assured in the policy will be the policyholder, and on the death of the original policyholder (assignor), the assignee (bank) will get the death benefit to recover the loan. So, the life insurance policy will be taken by the borrower and given as collateral to the bank for availing the loan from a bank.
The assignee can
1. Reassign the policy to the policyholder on clearing the loan.
2. Or assign it to any other person.
3. He cannot make a nomination on the policy which is assigned to him.
4. Will be entitled to the policy money after the maturity of the policy or on the death of the policyholder.
The assignment on the policy automatically does not get canceled on the death of the assignee, but the assignee’s legal heirs will be the owners of the policy, and they will be entitled to all death /maturity benefits of the policy holder’s policy.
When a policy is assigned, the assignee should pay the premium because the policy is now his property. But, the premium is paid by the assignor (policyholder) when a bank gives a loan and takes the assignment of a policy as a security against the loan. In the case of an assignment as a gift, the assignee has to pay the premium to keep the policy in force.
When the loan is repaid by the policyholder, the bank has to reassign back the policy to the policyholder. Many people will take loans and policies from the bank and assign the policy to the bank. In due course, they pre-close the loan or transfer the balance loan to some other bank taking a new policy and assigning it to the new bank to which the balance loan is transferred.
The catch is here “Bank will not automatically reassign back the insurance policy to the policy holder’s name without requesting for the same by the policyholder” and unaware of the same, the policyholder will be paying the premiums, and on the death of the policyholder, policyholder’s nominee will not get the death benefit. But the bank will get the death benefit. So on priority, get the insurance policy reassigned back by the bank on per-closure of the loan or balance transfer of the loan to some other bank.
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