What is Assignment and Nomination in Life Insurance?

Life insurance is a safety net that you weave to protect yourself and your loved ones from life's unexpected twists and turns. It provides financial security during challenging times just like a sturdy rope that can provide safety while climbing a mountain. Suppose you unfortunately pass away when the life insurance plan is active. In that case, the insurance company offers a sum of money to your family members, ensuring financial security during a difficult time. In addition, life insurance can also serve as a means for long-term savings and assist you in reaching financial milestones such as planning for your retirement, property investments, your kid’s education, and more. While understanding life insurance, it becomes important to know about the various nuances, like assignment and nomination in life insurance. What exactly do these terms mean? Let’s see!

What is Nomination?

The process of selecting a nominee is referred to as a nomination. Choosing a nominee is an important step in securing your family’s financial future. When you nominate someone, you are appointing them to receive the benefits of your life insurance policy in case something unfortunate happens to you during the existence of the policy period. This person is also known as a beneficiary. It is crucial to choose your nominee carefully and make sure that they understand their role. They need to be aware that they will be responsible for handling the proceeds of your policy. For example, if you choose your spouse as the nominee of the policy, he/she will need to know about the household needs, children’s requirements, any debts you have taken, and other financial obligations along with the claim settlement process and documentation required to receive the claim proceeds so that the proceeds from your policy’s protection can be used effectively.

Some Key Aspects About Nomination

Here are a few important things to know about nomination -

• Rights of Nominee If you're nominated as a beneficiary, you will only have rights to the life insurance policy if the insured person passes away. If the insured person survives the policy period, then the nomination automatically cancels.

• In Case of Minor Nominee The nominee can be an adult or a minor. If you choose a nominee who is below 18 years old, it's essential to appoint someone to receive the benefits on their behalf. This person, known as the appointee, is thus authorised by you to handle the claim payment in your absence and on the policy being matured and provided your nominee is a minor at that time.

• Change of Nominee You have the option to change your policy's nominee while it is active. The process is usually simple, and you can initiate it by submitting a request to your insurer. However, a nominee, has no rights to change and/or to request any changes to your life insurance policy

• Single or Multiple Nominee/s You have the flexibility to choose between a single nominee or multiple nominees. You can assign a specified percentage of the sum assured to each nominee if you choose to have multiple nominees.

• Nominee’s Demise In the unfortunate event of your nominee passing away before you, you will be required to appoint a new nominee. You can easily do this by informing the insurance company and providing them with any necessary documents.

What is Assignment?

When it comes to life insurance, assignment refers to transferring the rights of your life insurance policy to someone else as collateral. This person is known as the assignee, while you are called the assignor. By assigning your policy, the assignee becomes the new owner, and you will no longer have any authority or control over it. If you decide to assign your life insurance policy, it's important to note that only the ownership of the policy is transferred, not the risk associated with it. This means that the person whose life is insured will still be considered as the insured party. Assigning your life insurance policy can be useful if you want to use it as collateral for a loan, give it as a gift, or use it as security. Many people choose to assign their policy rights to banks for these purposes. Let’s understand this concept with an example. If you have a life insurance policy and you need a loan for something like buying a car or a house, you have the option to assign your policy to a financial institution, like a bank. This means that you are using your policy as collateral to secure the loan.

It's important to note that if you're unable to repay the loan or if something happens to you before the loan is fully repaid, the financial institution has the right to use the assigned policy to recover the remaining amount owed. This ensures that they can still get their money back even if you're no longer able to make the payments.

Now, let's see how you can implement the assignment process.

Some Key Aspects About Assignment

• Policy Contract Endorsement If you want to put your assignment into action, you can use a policy contract endorsement. A policy contract endorsement refers to a written amendment to an insurance policy. It is used to add, remove, or modify the policy’s coverage provisions.

• Termination of Nomination Suppose you decide to assign your policy in favour of the insurance company because of a policy loan. In that case, the nominee’s rights will be transferred to the assignee.

Types of Assignments

Assignments can be done in 2 simple ways - ➔ Absolute Assignment: When you go for an absolute assignment, you are essentially giving the complete ownership and rights of your policy to a third party without any conditions attached. This type of assignment is commonly used when you want to raise loans against your life insurance policies.

➔ Conditional Assignment: If you do not abide by any of the rules and terms mentioned in the contract, the insurer may enforce a conditional assignment.

Difference between Nomination and Assignment in Life Insurance

When it comes to assignment and nomination, the main distinction lies in policy ownership. In the case of nomination, the individual who initially holds the policy retains ownership throughout. However, with assignment, the ownership of the policy is transferred from one person to another. Let’s understand the difference in details as below:

Wrapping Up!

Assignment and nomination under life insurance policy contract are powerful tools that allow you to take control of your financial future and protect your loved ones. By opting to assign your policy, you can transfer it in times of financial necessity. On the other hand, by making a nomination, you have the power to designate specific individuals as beneficiaries. This provides your dependent ones reassurance that they will be looked after in your absence. Whether assignment or nomination, it is crucial to understand the intricacies of each option and consult a knowledgeable advisor who can guide you through the process.