To escape litigation, assign a policy

This will ensure the money goes to the intended person

Courts are piled with succession cases involving nominees and legal heirs. A typical case: After the death of a person, the appointed nominee gets into court battle with legal heirs, staking their claim. The judgments are divided based on the situation and intention of the owner. But to avoid such hassles in case of a life insurance, the policyholder can ‘assign’ the policy rather than appointing a nominee. This ensures that the sum insured amount is passed to the individual that the policyholder had intended to, without litigation.

“In multiple court rulings, it’s been reiterated that the nominee is deemed to be a trustee or a custodian. He or she is supposed to distribute the assets to the legal heirs as per the country's succession laws,” says Ramesh Vaidyanathan, founder and managing partner of Advaya Legal. This is true for all financial instruments, except shares and debentures, going by a recent Bombay High Court judgement.

Typically, a policy is assigned to a lender when the person goes for a big ticket borrowing such as home loans. Banks, in such cases, compulsorily ask the individual to get a life insurance and assign it to them. In case of demise, the lender gets the money. After deducting the outstanding loan amount, the remaining money is passed to the legal heirs. If the customer lives through the period, the lender will reassign the policy to him or her. This is known as partial or collateral assignment. If the policyholder wants the entire proceeds to go to another person, then he or she needs to opt for absolute assignment.

“Once a policy is assigned, it means the insured, called as assignor, loses the rights over the policy,” says Nilesh Parmar, chief operating officer, Edelweiss Tokio Life Insurance Company. However, he or she will continue to make the premium payments. Also, the policyholder cannot change the decision later unless the assignee is willing, says Parmar. The insured, therefore, needs to choose the assignee with care, especially in case of money back and unit-linked insurance plans. This is because, the maturity benefit, on completion of the policy tenure, is passed on to the assignee rather than the policyholder.

To assign a policy, the insured needs to make a separate stamped deed or it can also be done through an endorsement on the policy document, and submit it to the insurance company. In both the cases, a witness needs to sign the document.

One of the lesser known ways a husband assigns a policy to his wife is under the Married Woman Property (MWP) Act. This ensures that creditors cannot stake a claim on the sum insured on death of the insured and thereby ensured that wife and children are secured.

Recently, the Insurance Laws (Amendment) Act, 2015, has introduced two categories of nomination – discharge nominee and beneficial nominee. The former is just a custodian of the money. The latter will be the legal rightful person specified under a policy to receive money. The policyholder can only name restricted family members as beneficial nominee such as spouse, parents and children. But legal expert say that this, too, can be a matter of litigation.