Assignment of policy in life insurance means legal transfer of rights from the policyholder to another person. Normally, at the time of getting a loan against the policy, it is assigned to the bank or the financial institution as a collateral for the loan. Once the transfer is complete, the rights of the policyholder stand cancelled and the assignee (to whom the policy is assigned) becomes the owner of the insurance policy.
For instance, if you are taking a personal loan with the bank, you can assign your life policy to the bank as collateral. The bank becomes the owner of the policy, but the insurance will continue in your name.
If you default on the loan, the bank can surrender the policy and take the money. In case the policyholder dies without repaying the loan amount, the amount received from the policy by the policyholder’s nominee is payable to the bank.
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