Life policies - nominate or assign?

If you buy a life insurance policy, should you nominate a beneficiary or assign the policy? Here is the difference.

Contrary to popular understanding, in life insurance it is not the policy holder's right to nominate. Nor is it the right of the person whose life risk is covered under the policy.

Suppose a father purchases life insurance cover for his 9-year-old daughter.

The daughter (life assured) cannot nominate. Once she becomes a major, the policy would vest in her. Only then can she can effect a nomination under the policy. Assignment is a valid transfer of property in the policy, virtually cost-free and simple. Absolute assignment is always done for valuable consideration. The first effect of an assignment is cancellation of the nomination executed by the original policy holder. And with the absolute assignment, the assignee steps into the shoes of the policy holder.

Life assured and policyholder

‘Life assured' (life covered) and ‘policy holder' are different persons. A death claim arises on the death of the life assured. A policyholder need not be an individual; he could be a ‘legal person'. To cite an example, X takes a loan from a bank or a housing company and as security for the loan, assigns his life insurance policy to the institution absolutely.

The institution becomes the policyholder, who does not die. On the death of the assignee, his rights are transferred to his legal heirs or representatives. When the loan is repaid, the assignee re-assigns the policy to the original policy holder. Re-assignment is an assignment in favour of the original assignor. If he is the life assured he shall immediately be advised to effect a fresh nomination in the policy.

Life insurance companies generally send a notice, drawing the attention of the policy holder to this fact.The right of nomination belongs to that individual who combines in himself the two roles of life assured as well as policy holder.

Nomination can be effected at the commencement of the policy by incorporating the nominee's name in the proposal itself. A nomination can be made or changed at any time and any number of times during the term of the policy. Nomination is good, assignment better

The nominee has a right to receive the policy moneys and to give a valid discharge to the insurer. Policy moneys do not belong to the nominee though. Those belong to the legal heirs of the policy holder.

In effect, nomination in a life insurance policy helps the insurance company in disposing a claim by making payment to the nominee rather than helping the legal heirs of the policy holder in getting the claim.

In ‘assignment,' matters are different. In ‘absolute assignment' the assignee immediately becomes owner of the policy moneys. In conditional assignment, the assignee becomes owner of the policy moneys immediately on death of the life assured. Unlike in nomination, in assignment there is no scope for contesting claims.

A policy holder who wants to ensure that his policy moneys shall go to his wife shall assign his policy to her conditionally, the condition being that during his life time, he can do whatever transaction he wants on the policy.

Nomination is good, but assignment is a better guarantee for the policy claim reaching the intended person. Not all assignments cancel nomination.

Assignment in favour of a life insurance company who bears risk on the policy against a loan granted against it does not cancel nomination. A reassignment by the insurer on repayment of the loan also will not cancel nomination. Nomination ceases on maturity of the life insurance policy. An assignment does not.

(The author is President, Society for Promotion of Legal and Insurance Awareness - > lifeinsuranceinsights@gmail.com ..)

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