While under assignment full rights to deal with an insurance policy are assigned to another individual, under nomination a policyholder can nominate anyone depending on his choice to transfer death benefits
One of my relatives bought a life insurance policy recently with a lot of zest that he would be paying all the premiums, but he ended up changing his mind mid-way during the term. After paying premiums for three quarters only, he decided to stop the premium. Then his son sent him to his (son's) friend, who is a financial planner. The planner told him, “If you do not want to continue with your policy due to some certain reasons, then, instead of dropping its cover, you can assign this life insurance plan to someone else in your family, who is capable enough to pay the regular premium.” But he couldn't understand it. In fact, in context of insurance, people often get confused between assignment and nomination.
What is assignment?
The process by which a policyholder transfers his rights and benefits to another person or institution, is called assignment. In simple words, assignment of a life insurance policy means transfer of rights from one person to another. The person who assigns the policy, means transfers the rights, is called the Assignor and the one to whom the policy is assigned, means to whom the policy rights are transferred, is called the assignee. Once the rights are transferred to the assignee, the rights of the assignor are cancelled and the assignee becomes the owner of the policy.
Assignment is a facility of passing rights to generations. Also, it can be used as credit worthiness for fulfillment of a certain condition. It is important to note that assignment has the effect of nullifying the nomination of the policy. Assignment proves to be beneficial when one doesn't have enough assets to put as collateral security. Assignment entitles change in the proposer, who is the policyholder, and has nothing to do with life assured. It is important to note that partial assignments are not allowed by law. Assignment facility is permitted on all policies except policies which are purchased under Married Women's Property Act (MWP) and pension plans. In case of Children's Deferred Assurance plans, where children are the life assured and become policyholders after the vesting date, the policy can be assigned by them only after vesting date.
There are two types of assignment. Let us discuss those one by one.
Absolute Assignment means complete transfer of rights from the assignor to the assignee, without any further conditions applicable. Under this, the original assignor loses all his rights over the policy, and the same will get transferred to assignee (new policyholder). Also under ‘absolute assignment’, the original nominee gets cancelled and assignee will hold all the rights, including nomination. Here, he can either assign a nominee or reserve the nominee’s rights to himself. In case of absolute assignment, along with the rights, liabilities attached to the policy as well gets transferred to assignee. Also, once a policy is assigned with absolute assignment, it cannot be cancelled. It can be done only by another valid re-assignment.
Let’s take an example. Vikas owns two life insurance policies of Rs 2 lakhs and Rs 5 lakhs respectively. He wants to gift one policy of Rs 2 lakhs to his best friend Vijay. In that case, he would absolutely assign the policy in his name such that the death or maturity proceeds are directly paid to him. Thus, after the assignment, Vijay becomes the absolute owner of the policy. If he wishes, he may again transfer it to someone else for any other reason.
Conditional assignment means that the transfer of rights will happen from the assignor to the assignee subject to certain conditions. Under this, assignment is only done on the fulfillment of certain conditions or for certain time duration. For instance, in case of loan, the policy can be conditionally assigned in the name of the lender, and will again get transferred back, once the loan is fully repaid. If the policyholder fails to repay the loan, the bank will hold rights to surrender the policy and recover its money. Under this assignment, the nominee will remain the same and in case of death of original policyholder, the remaining proceeds after fulfillment of condition will be provided to nominee.
Now, let us under this with the help of same example. Suppose, Vikas has to take a loan of Rs 5 lakhs. So, he thinks of doing the same against the other policy (of Rs 5 lakhs). To take a loan from PQR bank, he needs to conditionally assign the policy to that bank. If Vikas would fail to repay the loan, then the bank would surrender the policy and get its money back. When Vikas's loan would be completely repaid, then the policy would again come back to him. If Vikas dies before completely repaying the loan, then the bank would surrender the policy to get back its money.
What is nomination?
Nomination is a right conferred on the holder of the policy of life insurance on his own life to appoint a person or persons to receive the policy moneys in the event of the policy becoming a claim by death. As far as nominee is concerned, he is the person designated by the policyholder to receive the proceeds of an insurance policy, upon the death of the insured. Nomination is not effective in a policy taken on the life of another person.
Change of nominee
Nomination can be done at the inception of the policy itself. All that a policyholder has to do is to provide the details of the nominee in the proposal form. If a nomination was not done at the time of filing the proposal, it can be done at a later date either by an endorsement made at the back of the policy document or by making the endorsement of nomination on a piece of paper pasted on the policy.
There are no restrictions on the policyholder regarding changing his nomination at any point of time, any number of times. The life assured is free to change or cancel a nomination and make a fresh nomination any number of times during the term of the policy. In addition, one can go for successive nominations as well. Successive nomination means that money should be paid to nominee A; failing him, to nominee B; failing whom, to nominee C etc. Such a nomination is treated in favor of one individual in the order mentioned and is acceptable in law.