Traditional life insurance policy doesn’t just insure your life. it could also be used as collateral for raising loan by assigning the policy to bank.
The idea of insurance has come a long way, thanks to growing financial awareness and the need for protection from the many uncertainties of life and health. From the ultra-rich to the aam aadmi, everyone needs and seeks insurance as per their profile.
Insurance being a niche financial product does come with some jargon that can sometimes be difficult for the common man to grasp. One such term not widely understood term is rights assignment. Here is everything you need to know about rights assignment for your life insurance policy.
The Basics
You may have come across the term “rights assignment” while seeking a home loan and wondered what the phrase means. Rights assignment, or simply assignment, of a life insurance policy means the transfer of rights from one individual to the other.
So as a policyholder, you can transfer your rights or assign them in favour of another person or entity. The policyholder assigning the policy to another person is known as “assignor” while the person to whom the policy is being transferred is known as “assignee”.
This is different from assigning a nominee who would receive the death benefit from someone’s life insurance. A nominee holds no other rights over the policy or its terms.
Forms of Assignments
Rights assignment in life insurance is broadly classified into two distinct types, namely absolute assignment and conditional assignment.
Absolute rights assignment:
As an assignor, when you make an absolute assignment, you are undertaking a complete transfer of all your rights without any conditions attached. For example, you have term insurance worth Rs 50 lakh. You can make an absolute assignment transferring your rights to a dependent, say, your son. The son is now not just the beneficiary of the insurance who will get the death benefit, but he also has the rights now to transfer the policy to someone else.
Conditional rights assignment:
Here, the transfer of rights are subject to conditions agreed upon by both assignor and assignee. For example, you have a term insurance of Rs 50 lakh.
You apply for a home loan. The lender seeks conditional assignment for the policy. This way, if anyone were to die before settling your loan, the bank has the rights to use the proceeds of your insurance policy to reclaim the outstanding loan balance. But if you were to repay the loan, the bank will reassign the policy
to you.
The Process
Any rights assignment, be it absolute or conditional, must be done in writing with a notice issued to the insurer. The best way to undergo a rights assignment is to execute a dedicated assignment deed. In the form of legal documents, you will have to register the deed and pay the appropriate stamp duty as per the legal fee of your state.
The assignment deed needs to be duly signed by both the assignor and assignee and attested by one witness. After execution of the assignment deed, you are required to serve a written notice of assignment and send the same to the insurance company along with assignment deed and KYC details of the assignee. Once the insurance company is satisfied with the paperwork involved, they will register the assignment with them for their official record. The insurer reserves the right to accept the assignment or decline the same if they feel it is not in interest of the policyholder or is for the purpose of unethical trading etc. As a policyholder, you cannot unilaterally cancel or revoke an existing assignments.
(The writer is the CEO of BankBazaar.com)
