Life insurance policies are generally perceived to be illiquid as encashing the policy via surrender comes at a cost. However, you can take a loan against your policy by assigning it and thereby avoid encashing it till maturity. Let us understand what assignment of a policy is and how it works.

What is assignment?

In simple words, assignment means a legal transfer. The concept has been borrowed from the law of property. It is a method by which a policyholder can pass on his interest in the policy to another person. The person assigning or transferring the policy is called the 'Assignor' and the person in whose name the policy is transferred is called the "Assignee'.

Once a policy is assigned and registered as such with the insurer the premium or other policy related notices are normally sent to the assignee.

A policy can be assigned to take a loan against it or in order to gift it to someone. A policy cannot be mortgaged by just placing it with another person. The transaction has no legal value. A mere deposit of a policy without an assignment does not create any charge on the policy. The policy can be gifted through assignment and proper endorsement provided the policy moneys are payable in India. Policies which are gifted in this manner are usually single premium policies or policies nearing maturity.

Difference between nomination and assignment

The basic difference between nomination and assignment is that while nomination is an authorization to receive the policy money after the demise of the policy holder, it does not create any interest in favour of the nominee so long as the policyholder is alive. The policyholder is free to deal with the policy the way he likes and can change the nomination any number of times during his lifetime.

An assignment, however, has the immediate effect of transferring the rights of the policyholder to the assignee. The person assigning the policy foregoes all his rights and interest in the policy and cannot deal with it any more.

Criteria for making an assignment

One should not make an assignment in a hurry. Policy holder should be clear about the purpose for which he is making the assignment. The purpose must be genuine and stated clearly in the endorsement. Natural Love and affection for spouse and children, blood relations or relations by marriage, valuable consideration, raising loan, creation of capital are some of the acceptable reasons for making an assignment.

Procedure for assigning a policy

An assignment can be made by an endorsement on the policy document or through a separate deed. An assignment made on the policy document is exempt from stamp duty. However, if it is made by a separate deed, it attracts stamp duty. There is no fee charged for the registration of an assignment by insurers.

The policyholder is required to serve a written notice of assignment on the insurance company and send either the policy document duly endorsed or the deed of assignment for registration. Unlike in the case of transfer of ownership of a car, in life insurance it is the assignor who has to complete the assignment formalities as the owner of the policy.

The assignment has to be attested by at least one witness and sent to the office where the policy is being serviced. The insurance company has to record the fact of registration of assignment and acknowledge the receipt of the notice. The assignment is registered at the office of the insurance company which is servicing that policy - whether it is the Branch Office or Regional Office or Head Office.

Reversal of assignment

The policyholder cannot change or revoke an assignment according to his will. One cannot unilaterally cross or delete an assignment. It can be reversed only with the consent of the person to whom it has been assigned. The process of reversal is called Reassignment. Here also a procedure similar to that followed for assigning a policy - giving notice of Reassignment to the insurance company, making an endorsement at the back of the policy document, getting it witnessed and then getting it registered with the insurer is required to be followed.

Assignment can be declined by insurer

Insurance Act, 2015 has added that an insurer may accept the transfer or assignment or decline to act upon any endorsement made where it has sufficient reason to believe that such assignment is not bona fide or is not in the interest of the policyholder or in public interest or is for the purpose of trading of insurance policy.

Some time ago, a few financial institutions in India had started trading in insurance policies as they found it profitable to do so. They would purchase a policy from the policyholder by paying him surrender value of the policy and then sell it to other banks or financial institutions and make profit in the bargain.

Life Insurance Corporation of India (LIC) barred these policies being transferred to a third party which traded in insurance policies. The matter went to court and has been pending before the Supreme Court for some time. However, the Insurance Act 2015 has made it clear that life insurance policies cannot be traded.

Types of assignments and what situations is each suitable for The assignment of life insurance policies in India is regulated as per Section 38 of the Insurance Act, 1938. The Act provides for two kinds of assignments - conditional and absolute.

Conditional assignment is useful where the policyholder desires the benefit of the policy to go to a near relative in the event of the insured's early death. This assignment is effected for natural love and affection. In this case when the assignee dies, the benefit reverts back to the life assured automatically. Conditional assignment is also different from nomination. While nomination can be changed unilaterally by the policyholder, conditional assignment cannot be changed by the policyholder without the consent of the assignee.

Absolute assignment is generally made for valuable consideration e.g. raising of loan from an individual / institution. This assignment has the effect of passing the title in the policy absolutely to the assignee and the policyholder in no way retains any interest in the policy. The absolute assignee can deal with the policy in any manner he likes and may even transfer his interest to another person or surrender the policy. Under absolute assignment when the assignee dies the benefits go to the legal heirs of the assignee and not to the heirs of the life assured.

In case the policy is assigned to take a loan, the assignee normally puts the condition that the policyholder shall continue paying premiums on the policy and also pay interest on the loan. Once the loan is repaid, the policy is reassigned to the policyholder.

What kind of policies can be assigned?

Assignment is permitted on all life insurance policies except the policies issued under Married Women's Property Act and annuities /pension plans.

Assigned policies free from attachment

Section 60, Clause (kb), of the Code of Civil Procedure lays down that all moneys payable under a policy of insurance on the life of the debtor will be free from attachment. This places an assigned policy outside the reach of the creditors.

In fact, there has been a case where, an income tax officer attached a policy in order to recover dues and hence directed the insurance company not to pay the policy money to the policyholder's wife to whom the policy was assigned. The company on this directive withheld the payment. Subsequently, the Court ordered the insurer to pay the maturity proceeds to the wife and also pay 15% interest on the policy money after maturity.

Current tax position

Tax benefit under section 80C of the IT Act on premiums paid on the policy can be claimed only by the life insured or policyholder provided he/she is paying them. This tax benefit cannot be claimed by an assignee even if he/she (the assignee) is paying the premiums because the policy is not on the life of the assignee.

Normally, the assignee has to pay the premiums on a policy after it has been assigned to him/her. However, in case the assignment is against a loan given to the assignor it is the assignor's responsibility to pay the premiums. In the case of an assignment against a loan the assignor can continue to pay the policy premiums and claim the Section 80C tax benefit on them as the policy is on his life and he is the person paying the premiums.

In all cases of assignment the assignee has the right to pay premiums but in case of loan it is assignor's obligation to pay them.

In certain other cases also the assignor can continue to pay the premiums if the assignee agrees. Income tax benefit under section 80C is only for the premiums paid for self, spouse or children. Therefore, if assignee permits, the assignor can continue to pay premiums even after assigning the policy and claim deduction under section 80C. For example, you can pay premium for the policy assigned to your wife or children and claim rebate under section 80C.

In case of assignment against loan, if the assignor does not pay the premiums then assignee has the right to pay them to protect his capital.

While assignee is not eligible for section 80C tax benefits on premiums paid, the policy maturity proceeds are tax-free in the hands of the assignee in most cases.

The amount on claim or maturity under a Keyman Insurance Policy is not exempt under Section 10 (10D) of the Income Tax Act if the company is paying the premiums. However, in case the policy has been assigned to the keyman and the keyman is paying the premiums, then the claim/maturity proceeds are exempt under Section 10 (10D).

Situations where policies can be assigned

A policyholder can use assignment as a financial tool in the following ways:

1. Assigning it to his wife or children - particularly daughters.
2. Assigning it to his mother or sister
3. Assigning it as collateral security for
(a) Raising loan from the bank for business purposes
(b) Housing Loan
(c) Loan from a Trust or any other financial institution for higher education of the child in India or abroad.
4. Assigning the policy to a 'Keyman' of the company to retain his services
5. Assignment to a partnership firm. A partnership firm may buy life insurance policies in the name(s) of one or more of its partners and also pay the premiums on these policies. In such a case, the partner(s) assign the insurance policy taken out by the firm to the firm itself.
6. Movie Producers assigning policies to actors / actresses as security for payments to be made to them at a later date.

What to check before assigning your policy

Some of the important things that you should keep in mind while assigning your policy are:

1) That the policy is eligible for assignment
2) That the correct endorsement forms are used in different types of policies
3) The assignment should not violate the country's foreign exchange or other regulations.
4) The assignment should not specify shares of each assignee. While a policy may be assigned to two or more persons but it cannot specify how much percentage share each should get.
5) That a guardian has been appointed when the policy is assigned to a minor.
6) That survivor clause is incorporated when assignment is in favour of two or more persons.
(The author is former zonal manager, Life Insurance Corporation of India)