Assigning A Life Insurance Policy As Gift Or Collateral

Taking out a loan is a financial decision that can be fraught with anxiety. With interest rates high and unstable market conditions, a loan is an added financial burden to be borne by the individual.

In order to ease some of the stress of repayment, individuals with life insurance policies can choose to use it as a way to raise funds.

In the case of a loan, the policyholder can assign the life insurance policy to another entity or individual as per Section 38 of the Insurance Act, 1938. According to the Act, an assignment entitles the assignee to all rights, titles and proceeds from the policy until the assignment is reversed.

So what does this mean and how does it help the policyholder who is looking to raise funds?

A policyholder who wishes to take out a loan requires collateral or assets against which the loan is granted to him/her. The collateral can be taken over by the lender in the event the borrower fails to repay the loan.

An individual who wishes to take on a loan but cannot show adequate collateral can use his life insurance policy as collateral by transferring the proceeds to the bank/lender for a specified duration.

How Does Assignment Work?

Individuals who have chosen to use their life insurance policy as collateral for a loan will have to transfer the proceeds of the policy to the lender for a specified duration or until certain terms are met. Once the assignment is accepted it is legally binding and becomes irreversible until the terms of the assignment are met. In the case of a loan, the terms could be repayment of the loan amount in full, whereupon the assignment will be reversed and the policyholder will have full control of the policy returns.

Assignments are to be executed with at least one witness present and must be attached to the original policy document with the necessary endorsement. The insurance company also has to be informed in writing that the assignment has taken place. The policyholder is required to provide information on the assignee as well as the circumstances behind the assignment to the insurance company before the assignment takes place. The insurance company is also required to acknowledge the same, after which the assignment can take place.

Life Insurance As A Gift:

While individuals might choose to use their life insurance policies as a way to raise collateral, an individual can also choose to assign a life insurance policy as a gift to another individual. This can be done if the policyholder wishes to bequeath his/her policy benefits to another individual who is not a nominee without nominating this individual to the policy.

If the particular life insurance policy already has nominees listed in the policy document, the policyholder will have to cancel these nominations through the assignment. This can be done by stating that all existing nominations under the policy stand cancelled and the assignee is the sole nominee under the policy henceforth.

Assignments made as gifts follow the same process as assignment as collateral, with the assignment needing to be done on stamp paper and attached to the original policy document.

In the case of a life insurance policy being assigned as a gift, the insurance company is to be notified of the change in nominee and beneficiary/beneficiaries and an acknowledgement is to be received from them before the assignment is legal.

In the case of the demise of the policyholder, the assignee will have sole rights to the policy returns and pay-outs, as specified in the assignment document. The former beneficiaries cannot claim any benefits as the assignment is considered the final authority on the disbursement of the policyholder's wishes, and only the beneficiaries listed therein will be considered the legal beneficiaries.

Policyholders who wish to bequeath their policies to individuals who are not listed as nominees or wish to change their nominees can opt to assign their policies to specific individuals. They can also choose to use their life insurance policy to raise capital by making a temporary assignment to the lender, with the policy being re-instated once the loan amount has been repaid.