Embedded Value: Assign your life insurance policy to get funds

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September 24, 2021 2:00 AM

You can borrow money from a bank by assigning your life insurance policy to it. On repaying the loan, bank must reassign the policy to you and a fresh nominee has to be made

There is also a less popular provision in the form of assignment of a life insurance policy which provides several options to the policyholder to convert the intrinsic value of a policy at a certain point of time into cash flow for himself.There is also a less popular provision in the form of assignment of a life insurance policy which provides several options to the policyholder to convert the intrinsic value of a policy at a certain point of time into cash flow for himself.

A life insurance policy is considered to be an inflexible product which binds the policyholder to certain terms and conditions for the whole tenure of the policy. The reason for such a rigid condition in the insurance contract is the risk factor which is the very purpose of insurance business. Insurers want to continue their relationship with the policyholders so that the policyholder’s family is not deprived of financial protection.

However, insurers have been providing some liquidity through provisions such as loan facility after the policy acquires paid-up value, surrender of the contract for immediate cash, money back instalments, etc. There is also a less popular provision in the form of assignment of a life insurance policy which provides several options to the policyholder to convert the intrinsic value of a policy at a certain point of time into cash flow for himself.

Assignment of a life insurance
Assignment of a life insurance policy is an act to transfer one’s rights to the policy money to another entity, an individual or an institution for various reasons valid in law. A very simple example of assignment is the practice of borrowing money from a bank for the purpose of buying a house by assigning one’s life insurance policy to the bank. The policy is considered by the bank as an acceptable security, subject to certain simple conditions.

There are two types of assignments, absolute and conditional. The former results in transfer of complete rights and title from the policyholder to another person or entity whereas the latter stands for limited and mostly short-term transfer of one’s rights and title which revert back to the assignor on the fulfilment of certain conditions. Assignment is a legal process for transferring one’s ownership of the policy though the risk on the life of the policyholder continues and he continues to pay the premium to keep the policy in force which also results in gradual increment in the intrinsic value of the policy.

Absolute assignment cannot be revoked by the policyholder, hence the death claim or the maturity claim proceeds will have to be paid to the assignee by the insurer. Hence the act of assignment must be brought to the notice of the insurer. On fulfilment of certain conditions such as repayment of full loan amount, the assignee must reassign the policy to the policyholder so that claim proceeds are paid to the policyholder or to his or her nominee.

Execution of assignment
Assignment must be executed on a stamp paper as applicable at the place of executing assignment. However if the assignment is executed on the body of the policy document no such stamp paper is required. It is advisable to execute assignment on the policy bond so that the assignment does not escape the attention of the insurer while settling claims. Insurers very often find that banks overlook the need to reassign the policy in favour of the borrower after the loan is fully repaid. In such situations, settlement of claim gets delayed and the policyholder or the claimants face undue hassles to get their rightful amount. In case of death claim where reassignment has not been executed or intimated to the insurer, the claim proceeds go to the banks and then the banks have to undertake lots of approvals to refund the money to the claimants. Here, one point must be noted by the lenders as well as the policyholders: Nomination under a policy stands cancelled upon assignment and after reassignment fresh nomination is required to be made.

Generally, this provision of law is overlooked by both the assignor as well as the assignee. No fresh nomination would mean procuration of succession certificate and several attached paraphernalia causing tremendous hardship to all concerned. Nomination is the right of the policyholder to appoint a person who can receive the claim amount in case he dies during the term of the policy. The nominee gives a valid discharge to the insurer upon receiving such a claim amount under a policy.

The provision of assignment thus makes it possible for the policyholder to benefit from the acquired monetary value of a policy over a period of time without surrendering a policy and losing the benefit of risk cover for his loved ones. A life insurance policy is a highly acceptable collateral by financial institutions and a policyholder can make use of his existing policies for the purpose of raising loans during the course of his earning life.

On the other hand, assignment of a whole life policy to wife or husband, children and grandchildren is the safest way of transferring wealth after death. Nobody can dispute such inheritance of wealth. The assignee will have absolute right on the policy proceeds.

The writer is former MD & CEO, Star Union Dai-ichi Life Insurance

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