Life Insurance: Multiple Assignment Of Benefits Possible?

Life insurance policies are designed to provide financial security to policyholders and their beneficiaries. However, there are times when a policyholder may need to transfer ownership or rights of their policy to another individual or entity. This is known as an assignment of a life insurance policy. In this process, the original policyholder (assignor) transfers ownership rights, title, and benefits of the policy to another party (assignee). There are two main types of assignment: absolute assignment, where the policyholder transfers all rights without any conditions, and conditional assignment, where the transfer is subject to certain terms being met. Another type, collateral assignment, is a form of conditional assignment where the policy is used as security for a loan. In this case, the lender becomes the beneficiary of the policy proceeds to the extent of the outstanding loan amount. Once the loan is repaid, the policy reverts to the original owner. It's important to note that the assignment of a life insurance policy is typically irrevocable and may have legal and financial implications for both the assignor and assignee.

Absolute assignment

An absolute assignment is often done as a gift to a loved one or to pay off an outstanding debt. For example, a policyholder might gift their policy to a family member or friend. Alternatively, they might assign their policy to a bank or lender to secure a loan. In this case, the bank or lender becomes the beneficiary of the policy and will receive the claim benefit after the policyholder's death.

It is important to note that an absolute assignment is typically irrevocable. The original owner of the policy gives up their rights and privileges but remains responsible for payments. If the new owner fails to make payments, the original owner will be held responsible. Therefore, absolute assignment should be considered carefully.

Conditional assignment

For example, if you take out a loan from a bank and assign your life insurance policy to that bank under conditional assignment, the bank will be able to surrender your policy and recover the money owed to them if you fail to repay the loan. Once the loan is fully repaid, the policy will be automatically transferred back to you.

The process of conditional assignment involves filling out a form that mentions the reason and condition of the assignment, the assigned percentage of the sum assured, and who will pay the future premiums. Both the assignor and assignee must provide a declaration to the insurance company. The assignor must declare that the transfer is made of their own free will.

Collateral assignment

To apply for collateral assignment, you must first understand the requirements of the lender. Lenders generally require an active life insurance policy with cash value, so a term life insurance policy may not qualify. If you need to, you can then apply for a new life insurance policy that meets the lender's requirements. Once approved, you complete a collateral assignment form, providing your lender's contact details so they can be added as the collateral assignee until your loan is repaid. The form must be signed by both you (the assignor) and the lender (the assignee).

Assigning a nominee

The process of assigning a nominee is called "nomination", and it is not mandatory in an insurance policy. However, it is highly recommended by insurance companies as it simplifies the claims process, provides financial security, and helps to avoid legal complications and disputes.

There are different types of nominees in a life insurance policy:

• Beneficial nominee: The nominee who receives the entire death cover, and no legal heir can claim the proceeds.
• Minor nominee: A nominee under 18 years of age, for whom a legal guardian is appointed to handle the benefits until they reach adulthood.
• Multiple nominees: The policyholder can nominate more than one person and specify the percentage of benefits each should receive.
• Contingent nominee: A secondary nominee who receives the benefits if the primary nominee predeceases the policyholder.
• Non-family nominee: Policyholders may nominate distant relatives or even friends, though this may require additional documentation.

Policyholders can change their nominees as often as they wish, but the latest nominee takes priority. It is important to note that the nomination process is revocable, meaning policyholders can change or update their nominees at any time during the policy term.

The main purpose of assigning a nominee is to ensure that, in the event of the policyholder's death, the benefits are distributed to a designated individual or entity, providing financial security for dependents and avoiding legal complications. It also aligns with estate planning strategies, allowing policyholders to specify how proceeds should be allocated and ensuring that specific individuals receive support according to their wishes.

Nomination is a crucial step in the life insurance process, providing peace of mind that loved ones will be cared for as intended.

The role of the assignee

The assignee has full legal rights and ownership responsibilities. They are entitled to receive the policy money and, in the case of a collateral assignment, the assignee acts as a beneficiary, receiving the death benefit to the extent of the outstanding loan amount. Once the loan is repaid, the assignment is released, and the policy reverts to the original owner.

In the case of an absolute assignment, the assignee has complete ownership of the policy with no conditions, whereas a conditional assignment transfers the policy rights under specific terms and conditions.

The assignee may also be responsible for paying future premiums and designating nominees.

Frequently asked questions