Until some time back, partial assignment of a life insurance policy to another individual or a legal entity was not allowed. For instance, if an indivudal who had a life insurance policy with a sum assured of ₹25 lakh was availing of a housing loan of ₹7 lakh from a housing finance company, the life insurance policy could be assigned to the housing company as collateral.
If the individual assigned the ₹25 lakh policy to the housing finance company instead of going in for a new policy for a sum assured of ₹7 lakh or splitting the existing policy, .the finance company can refuse to pay the balance amount of death claim (over their loan plus interest) to the widow of the insured.
And every assignment meant cancellation of nomination in the policy. On reassignment of the policy to the life assured, he should again nominate a person to receive policy moneys in the event of his death during the term of the policy.
For every assignment, whether full or partial, one shall now give reasons for the assignment, antecedents of the assignee/transferee, and the terms on which the assignment/transfer is made.
The insurer can act upon the assignment/transfer if he believes that such assignment/transfer is either not bona fide or not in the interest of the policyholder. The insurance company shall, in such cases, record the reasons for their declining to act on the assignment and inform the policyholder within 30 days, who may approach the regulator for reversing the insurer’s decision.
In a partial assignment, the liability of the life insurance company is limited to the amount secured by the partial assignment and such policyholder (assignor) shall not be entitled to further assign the residual amount payable under the same policy.
Effect on nomination Assignment of a life insurance policy does not cancel nomination, but affects nominee’s rights only to the extent of insurer’s right on the policy.
Those nominations, which have been cancelled automatically when assignments were effected on the policies earlier due to the operation of law, get revived when the policies are reassigned by the assignees or transferees. This protects the interests of the insured who might have missed filing fresh nominations.
The writer is President, Society for Promotion of Legal and Insurance Awareness