What Is Nomination And Assignment in Life Insurance?

Nov 22, 2022
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Life insurance is a contract between an insurer and a policyholder. An insurer guarantees a sum assured to the beneficiary/nominee on the policyholder's unfortunate demise in return for the premiums paid. When entering into any contract, it is necessary that both parties read and understand the fine print. While buying a life insurance policy, a potential policyholder may come across certain jargon that is difficult to understand for a layman. Entering into a contract without thoroughly reading or understanding the exact meaning of these terms can lead to disappointments in the future. Hence, before making a buying decision, it is best to read the fine print and know the exact meaning of all the terms. Nomination and assignment are two terms that many policyholders get perplexed with, but you must understand them before buying life insurance.

What is Nomination?

You might be familiar with the nomination facility in Savings Bank Account. Nomination in life insurance works in the same way. While buying a life insurance policy, the policyholder appoints a nominee to receive the insurance benefits. Upon the insured's death, the nominee receives the sum insured by the life insurance policy. Section 39 of the Insurance Act 1938 governs the nomination process.

So, a nomination is a right given to the policyholder/ insured to appoint a person (nominee), usually a close family member, to receive the insurance benefits in the event of the demise of the insured.

What are the types of Nominees?

Here are some of the types of Nominees:

1. Beneficial Nominees:

The Insurance Regulatory and Development Authority of India has introduced the new term 'beneficiary nominee' instead of 'nominee'. The policyholder has a right to make any of his/her close relatives, i.e., parent, guardian, child, or spouse, a nominee. Appointing the nominee eliminates the chances of any disputes arising at the time of claim settlement. Bear in mind that only your immediate family members can become beneficial nominees.

2. Minor Nominees:

Many policyholders prefer appointing their child/children as nominees for their life insurance policies. However, if the child has not completed 18 years and is still a minor, he/she does not meet the eligibility criteria to handle the claim amount. So, in case of an unfortunate demise of the insured, the claim amount is payable to the legal custodian or the child's appointee. The legal custodian hands over the sum to the child when he/she turns 18 years old.

What Is Nomination And Assignment in Life Insurance?
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3. Non-family Nominees:

In certain exceptional situations, the nominee can choose a non-family member as his/her nominee. However, you should check the terms pertaining to the nomination with your insurer and know that appointing a non-family nominee is generally not recommended.

4. Changing Nominees:

The policyholder has the right to change the nominees as many times as he/she wants. But bear in mind that the latest nominee will supersede all the previous nominees.

5. Multiple Nominees:

The policyholder can choose to appoint more than one nominee to his/her life insurance policy. In the case of multiple nominees, the policyholder divides the share of the total amount between multiple nominees. If the policyholder has not divided the share/percentage of the policy, the claim amount is equally divided between nominees.

6. Successive Nominees:

The successive nomination allows the policyholder to choose more than one nominee in a successive manner. So, in case of the demise of the policyholder, the claim amount will go to the first nominee. In case of the demise of the first nominee, the claim amount will go to the second nominee, and so on.

What are the key points to note about the Nomination?

  • In order to appoint a nominee, the policyholder and insured must be the same.

  • If the policyholder and insured are different individuals, the claim benefits are paid to the policyholder.

  • Certain life insurance plans do not allow any change or modification in the nominee unless the demise of the nominee.

  • The policyholders are allowed to appoint more than one nominee.

What is an Assignment?

An assignment is transferring the rights, title, and ownership of the life insurance policy to another individual or entity. The policy can be assigned when the rights of one person are transferred to another.

The person who transfers the policy is called an assignor, and the person to whom the policy is transferred is called the assignee. The assignment is governed under Section 38 of the Insurance Act 1938.

There could be many reasons why a policyholder wants to transfer his/her policy to someone else. For example, in the case of a Loan Against a Life Insurance Policy, the policyholder assigns his/her life insurance policy to the bank. So, the bank becomes the policy owner, and in case of the demise of the assignor, the bank claims the insurance benefits.

What are the types of Assignments?

1. Absolute Assignment:

Under absolute assignment, the assignor transfers all the rights, titles, ownership, and interest to another person or entity. The ownership of the policy is transferred to the other party without any terms and conditions. This type of assignment is generally done for raising loans against life insurance policies.

2. Conditional Assignment:

As the name suggests, under conditional assignment, the assignor transfers the rights to the assignee depending on the terms and conditions. So, the policy is assigned only if the conditions are fulfilled.

What are the key points to note about an Assignment?

  • The assignment of the life insurance policy transfers only the ownership and not the risk associated with it.

  • The assignment may lead to cancellation of the nomination only when it is done in favour of the insurance company due to the policy loan.

  • The policyholder can assign any policy except a pension plan and a Married Women's Property Act (MWP).

  • In order to effect the assignment, a policy contract endorsement is required.

What are the key differences between Nomination and Assignment?

1. A nomination is an appointment of a person (nominee) to receive the insurance claim in case of the demise of the insured. An assignment is a transfer of the policy's rights, ownership, and interest to another person or entity.
2. There is no need for attestation by the witness. It requires attestation by at least one witness.
3. There is no consideration in case of a nomination. An assignment could be with or without consideration.
4. It does not entitle the nominee to the right to sue under the property. It entitles the nominee to the right to sue under the property.
5. Nominations can be changed or modified several times. Assignments can be concealed only once or twice in a policy term.
6. It is made in favour of an immediate family. It can be made in favour of an immediate family or external party/entity.
 
 

To conclude:

The basic difference between Nomination and Assignment is the purpose for which it is undertaken. While a nomination helps in protecting the interest of the policyholder and insurer in providing the claim benefits under a life insurance policy, an assignment helps in protecting the interest of an assignee for availing of the financial benefits under a life insurance policy. Knowing all such terms will help you choose the best-suited option for you and make the most of your life insurance policy.

 

Warm Regards,
Ketki Jadhav
Content Writer



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