Life Insurance Practices PDF

Facebook Page Facebook Group Telegram Group 211 CHAPTER 10 ASSIGNMENT, NOMINATION AND SURRENDER OF POLICY...

Facebook Page Facebook Group Telegram Group 211 CHAPTER 10 ASSIGNMENT, NOMINATION AND SURRENDER OF POLICY Chapter Introduction Insurance companies have diversified, and introduced insurance products that can cater to each and every financial need of an individual. When an individual invests in an insurance policy they are actually investing in a long term asset. This asset not only provides insurance cover and returns on the investment, but can also be used to avail loan in times of financial crunch. In this chapter we will discuss the loan facility and surrender benefits offered by insurance products, which provide sufficient liquidity to a policyholder. We will also discuss the nomination and assignment facilities available under a life insurance policy. Learn about assignment of insurance policies. Learn about the nomination feature and its importance. Understand the concept of surrender of an insurance policy. Learn about loans and foreclosures against insurance policies. Facebook Page Facebook Group Telegram Group 212 Look at this scenario Rajeev Tandon is a small businessman who owns a grocery shop. He wishes to purchase a house for which he is looking for various home loan options. He lives in a rented apartment and does not want to offer his shop as collateral as it is the main source of his livelihood. He is wondering what other option he has. He discusses his problem with the insurance agent who informs him that he can assign a policy in favour of the bank and take a loan with the insurance policy as a collateral.He could also avail of a loan under his insurance policy if the insurance product has this facility. In this chapter we will see how the insured can take a loan against the insurance policy by assigning the policy in favour of the insurance company or the bank. 1. Learn about assignment of insurance policies. [Learning Outcome a] Assignment The process of transferring the title, rights and interest on assets or property from one person to another is known as assignment. Assignment is generally done to provide security against loan. The person or policyholder who transfers the title on the assets or property is known as the assignor and the person to whom the title on the assets or property is transferred is known as the assignee. Features of assignment Assignment can be done only after the purchase of a policy. Assignment is applicable to all kinds of insurance plans except pension plans and plans under Married Women’s Property (MWP) Act. Section 38 of the Insurance Act, 1938 deals with assignment of insurance policy. Assignment may be made with or without consideration. Assignor should be a major and competent to contract. Assignor should have complete ownership of the policy. The life assured, if minor or if not the policyholder or proposer, does not have any rights over the policy, hence cannot assign the policy. Only the proposer or policyholder can make an assignment. In the case of child plans, when the life assured (child) becomes a major and the title passes to him, he can make an assignment. Facebook Page Facebook Group Telegram Group 213 After assignment the assignee gets complete ownership and rights over the insurance policy. He can even surrender the policy. The assignee also gets the legal right to sue under the policy. Assignment can be done towards a person or an institution. There can be more than one assignee. In this case, each assignee will acquire the rights on the insurance policy as ‘tenants’ in common. This means that each assignee has an undivided and specific interest in common with the other assignees. If one of the tenants dies his interest does not pass on to his co- tenants, but gets transferred to his legal heirs. Insurer has to record the fact of the assignment in their records. Assignment once made cannot be cancelled. Policy can be re-assigned in the name of the life insured. Types of assignment: There are two types of assignments: Conditional assignment: in this type of assignment, the rights, title and interest in the policy automatically revert back to the assignor on the occurrence of the specified conditions as mentioned below: on the death of the assignee before the death of the assignor the assignor survives the date of maturity of the insurance policy the loan is repaid The consent of the assignee need not be taken for reversion of the policy if the condition becomes effective. It is automatic. A person who takes a home loan from a bank can pledge their insurance policy (if any) to the bank as a collateral security against the loan. In this case the bank will be the assignee and the policyholder will be the assignor. The policyholder or assignor will continue to pay the premium, while the assignee (bank) gets the financial rights on the insurance policy, including the death benefit. The condition in this will specify that the bank will be entitled to benefit from the policy only to the extent of the outstanding loan. The balance amount of the claim amount is returned to the legal heirs of the deceased policyholder (in case the policy holder dies before repaying the loan) Absolute assignment: in this type of assignment the rights, title and interest of the assignor passes completely to the assignee. Absolute assignment is generally done for valuable consideration. The policy vests in the assignee absolutely and forms part of his estate on his death. Facebook Page Facebook Group Telegram Group 214 Diagram 1: Types of assignment Process of assignment The assignment can be done by either of the following process: Making an endorsement on the policy document: in this process stamp duty is not required. The assignment form along with the policy should be duly signed by the assignor, assignee and a witness. Executing a separate assignment deed: in this case stamp duty needs to be paid. The assignment will be effective w.r.t. the insurer only if it is registered with the insurer in their records. The date on which the notice of assignment is delivered to the insurer shall regulate the priority of all claims under a transfer or assignment. Question 1 In which of the following types of assignment does the assignee become the owner of the policy? Conditional assignment Absolute assignment Endorsement assignment Separate assignment Facebook Page Facebook Group Telegram Group 215 Learn about the nomination feature and its importance. [Learning Outcome b] Nomination Nomination is the right provided to the policyholder to appoint a certain person, who will receive the benefits of the policy in case of the policyholder’s death during the policy term. In case the life assured survives till the date of maturity, the nomination will be treated as cancelled automatically. The person to become entitled to the benefits of the insurance policy on the death of the insured is known as the nominee. There can be more than one nominees appointed by the policyholder. This is a simple method for speedy settlement of death claims. Process of nomination: Nomination can be done by either of the following methods: At the time of proposal: at the proposal stage, the policyholder needs to fill up the nomination column in the proposal form, with complete details of the nominee such as: name of the nominee age address relationship between nominee and the policyholder etc The information regarding the name and relationship of the insured with the nominee is included in the schedule of the policy. If sufficient space is not available in the form, then nomination can be mentioned on a separate piece of paper and pasted on the policy document and the life assured needs to sign at the edges where the slip is attached to the policy. This may also be needed when nomination is to be changed through an endorsement. After the commencement of the policy: a notice for nomination is served to the insurer by the policyholder, or life assured (in case the policyholder and the life assured are different persons).The insurer will then register the same in their records. Facebook Page Facebook Group Telegram Group 216 Features of Nomination: Section 39 of the Insurance Act 1938 deals with nomination of insurance policies. Nomination can be revoked or cancelled anytime by the policyholder of a policy on his own life during the term of the policy. If the policyholder and the insured person in an insurance policy are two different people, then in this case the policyholder cannot appoint nominee(s) The nominee cannot influence the policy in any way. He will be entitled to the benefits of the policy only if the death of the life assured during the term of the policy. There can be more than one nominees appointed by the life assured. In case of death of one of the nominees before the death of the life assured during the term of the policy only the surviving nominees as on the date of death of the life assured will be paid the death benefit. The nominee does not get the title to the death claim. He has to hold the benefits of the death claim, on behalf of the legal heirs of the life assured. The legal heirs need to be determined on the basis of their relationships with the life assured. If a will is presented, the people mentioned in the will become entitled to the death claim. If the nominee dies after the death of the policyholder but before death claim settlement, then the policy moneys would form part of life assureds’ estate and his legal representatives will be paid the death claim. In policies where the maturity amount is payable in installments, the remaining installments are paid to the nominees. On assignment of the policy, nomination automatically gets cancelled. However, an assignment made in favour of the insurer for loan granted against the security of the policy does not cancel the nomination. If the nominee is a minor: If the nominee appointed is a minor, then in this case the life assured needs to duly appoint an appointee, who is a major. The appointee has to duly sign the document to confirm that he consents to fulfil the duties of an appointee. The life assured can change the appointee at any time during the policy term. When the minor turns major, the appointee loses his status. In case the nominee appointed is minor and no appointee has been appointed, then the proceeds of the death claim will go to the legal heirs of the deceased. Facebook Page Facebook Group Telegram Group 217 Nomination Vs Assignment Basis of Difference Nomination Assignment What is Nomination or Nomination is the process Assignment is the process Assignment? of appointment of a person of transferring the title of to receive the death claim the insurance policy to another person or institution. When can the Nomination can be done Assignment can be done nomination or either at the time of only after commencement assignment be done? proposal or after the of the policy. commencement of the policy. Who can make the Nomination can be made Assignment can be done by nomination or only by the life-assured on owner of the policy either assignment? the policy of his own life. by the life assured if he is the policyholder or the assignee Where is it applicable? It is applicable only where It is applicable all over the the Insurance Act, 1938 is world, according to the law applicable. of the respective country relating to transfer of property. Does the policyholder The policyholder retains The policyholder loses the retain control over the title and control over the right, title and interest policy? policy and the nominee has under the policy until a re- no right to sue under the assignment is executed and policy the assignee has a right to sue under the policy. Is a witness required? Witness is not required. Witness is mandatory. Do they get any rights? Nominee has no rights over Assignee gets full rights the policy. over the policy, and can even sue under the policy. Can it be revoked? Nomination can be revoked The assignment once done or cancelled at any time cannot be cancelled, but can during the policy term. be re-assigned. In case of minor: In case the nominee is a In case the assignee is a minor, appointee has to be minor, a guardian has to be appointed. appointed. Facebook Page Facebook Group Telegram Group 218 What happens in case of In case of nominee’s In case of conditional the nominee’s or death, the rights of the assignee’s death, the assignee’s death? policy revert to the rights on the policy revert policyholder or to his legal back to the life assured, heirs. based on the terms of assignment. In case of the absolute assignee’s death, his legal heirs are entitled to the policy. What happens in case of In case the nominee dies In case the assignee dies death of the nominee or before the settlement of before the settlement, the assignee after the death death claim, the death policy money is payable of the life-assured and claim will be payable to to the legal heirs of the before the [payment of the legal heirs of the life assignee and not the life- the death claim assured. assured who is the assignor. Can creditors attach the Creditors can attach the Creditors cannot attach policy? insurance policy which the policy unless the has a nomination in it. assignment is shown to have been made to defraud the creditors. Question 2 Which of the following is not correct regarding nomination? The witness has to duly sign the nomination papers. Nomination can be revoked at any time. Nominees have no right over the policy In case the nominee is a minor an appointee has to be appointed. Facebook Page Facebook Group Telegram Group 219 Understand the concept of surrender of an insurance policy. [Learning Outcome c] Surrender of insurance policy A life insurance policy can be withdrawn before maturity, and this process is known as ‘surrender of policy’. The amount payable to the policyholder once the insurance policy is surrendered is known as surrender value or cash value. Insurance companies provide the surrender feature in a policy to overcome the biggest disadvantage of insurance policies which is ‘liquidity’. Hence in case of financial emergencies, a policyholder has the option to surrender his policy and withdraw the benefits, subject to certain conditions applicable under the policy. Insurance companies generally provide detailed data regarding surrender value for different years within the term of the policy. Surrender value could be a guaranteed amount by the insurance company, although the actual surrender may be better than the guaranteed surrender value from the guaranteed one. The rules for surrender of ULIP’s are bound by a different set of rules. Features of Surrender: Surrender value is usually a percentage of premiums paid or a percentage of the paid up value. The higher the policy term, the lower is the surrender value factor. It does not depend on the actual premium or the mode of premium. The percentage called the surrender value factor (S.V. Factor) increases as the duration of the policy since commencement increases. If there are two policies: ‘A’ for a 15 year term and ‘B’ for a 20 year term, then the surrender value factor after 10 years will be more for policy A than for policy B. The surrender value factor increases with an increase in the policy period. The surrender value of a certain policy after 15 years will be more than that of the same policy after 10 years. Facebook Page Facebook Group Telegram Group 220 Surrender value of the policy is kept low by insurance companies during the early term of the policy. There are two reasons for this: The premium collected in the early years is not credited to the policy account like a bank account, but a part of it is used for payment of death claims that may arise. Insurance companies try to discourage early surrender of the policy. If the surrenders in the early years are made attractive. an individual would prefer to surrender the policy in case he faces economic difficulties. The healthier lives are more likely to surrender their policies than the unhealthy ones, distorting the expected averages of the experience of the pool of policy-holders i.e. this could lead to an adverse selection. Question 3 For which of the following insurance plans will the surrender value factor be the highest after three years from inception (if the sum assured of all the four policies is the same)? The insurance plan for 10 years The insurance plan for 15 years The insurance plan for 20 years The insurance plan for 30 years Learn about foreclosures and loans against insurance policies. [Learning Outcome d] Loans There are many benefits of purchasing an insurance policy. One of those benefits is the availability of loans against an insurance policy. Under this facility, a policyholder can request for a loan and offer his insurance policy as collateral. The loan amount will depend upon the total surrender value of the insurance policy as the loan offered is limited to a certain percentage of surrender value. Facebook Page Facebook Group Telegram Group 221 When a loan is taken by the policyholder, the policy gets assigned absolutely to the insurer. However, nomination continues to be valid even after the assignment in this case. All insurance products do not offer the facility of loans. Features of loan against insurance policy Loan amount: the loan amount granted against a life insurance policy is generally 90% of its surrender value. In the case of fully paid up policies, the loan generally granted up to 85 % of a policy’s surrender value. This formula can vary form one insurance company to another. The rate of interest on outstanding loan charged is generally paid half-yearly to coincide with the due date of premium. If the premiums are continued to be paid regularly, then the surrender value of the policy will continue to increase, which can be adjusted against the outstanding loan amount and interest. The minimum period for which the loan can be granted is six months. If the policyholder wishes to repay the loan before six months, he will have to pay the loan interest for minimum six months. If the policyholder dies within six months of taking the loan, the interest will be charged up to the date of death of the life assured. If the policy matures within six months of taking a loan under the policy, then the interest will be charged up to the date of maturity only. The loan could be repaid during the policy term. The payment of loan can be delayed and adjusted at the time of death claim. The remaining balance left after repayment of the loan is paid to the legal heirs of the life assured. Broken period The period between the loan approval date and the anniversary date of the policy is known as broken period. Generally, if the date of the anniversary is more than six months away then broken period will be between the loan approval date and six months prior to the date of policy anniversary. Interest is charged separately for the broken period. Additional loan against insurance policy There can be more than one loan taken by the policyholder during the term of the policy. Additional loan that is being granted along with previous loan generally does not exceed 90 % (85% for fully paid up policies) of the surrender value. Overdue interest on previous outstanding loan is deducted while granting additional loans. Facebook Page Facebook Group Telegram Group 222 Insurance plans that are not eligible for loan against insurance policies Annuities and pension plans are not eligible for loans as they do not acquire adequate surrender value. Money back policies are also not eligible for loan as a part of the sum assured is returned to the policyholder at periodic intervals. In child plans, loan cannot be granted during the deferment period (when the child is a minor) Certain plans of life insurance do not offer a loan facility under certain products. Foreclosures The process of closing the insurance policy or writing it off before its maturity date by an insurance company is known as foreclosure. When a policyholder decides to avail a loan, he has two choices: repaying the loan amount with interest during the policy term; or accumulating the loan debt over the policy term, and adjusting it at the time when claim arises The second option can be exercised only when the premium has been paid regularly. If there has been default in premium payment, then it needs to be ensured that the surrender value of the policy needs to be sufficient enough to meet the arrears of loan and interest. If the loan amount with interest due is likely to get more than the surrender value of the policy, foreclosure becomes essential. Features of foreclosure When the insurance company decides to foreclose the policy, the policyholder is intimated, and advised to make timely payment of arrears of interest on loan to avoid foreclosure. If the default in the repayment continues, then the policy is foreclosed i.e. policy is surrendered for repayment of the outstanding loan. The balance surrender value (if any) that remains after the repayment of loan with interest is paid to the policyholder. Once foreclosure is done, nomination, if any, will not be valid. If the policyholder dies before the payment of the balance surrender value, then the payment will be made to his legal heirs and not the nominees. Facebook Page Facebook Group Telegram Group 223 Reinstatement of the policy: a foreclosed policy can be reinstated in following cases: The policyholder is medically fit. Outstanding loan interest with accumulated interest thereon is paid till date. If the balance surrender value has been paid to the policyholder, then in this case the policy cannot be reinstated, as it indicates that the policyholder had accepted the foreclosure action. Any further request to revive the policy raises doubts about moral hazard. Question 4 The minimum duration of a loan against an insurance policy is of _________ 15 days 3 months 6 months One year Summary The process of transferring the right title and interest on assets or property from one person to another is known as assignment. Nomination is the right provided to the policyholder to appoint a certain person, who will receive the benefits under the policy in case of his death of the life- assured during the policy term. The process of withdrawing a life insurance policy before maturity by the policy-holder is known as surrender. The amount payable to the policyholder, once the insurance policy is surrendered, is known as the surrender value. When loan is taken by a policyholder, the policy gets assigned absolutely to the insurer. The period between the loan approval date and the anniversary date of the policy is known as the broken period. The decision regarding foreclosure is taken by the insurance company if there has been default in loan repayment by the policyholder. Facebook Page Facebook Group Telegram Group 224 Some important terms / definitions you have learnt in this chapter Assignment Nomination Surrender value Foreclosure Answers to Test Yourself Answer to TY1 The correct answer is B. In absolute assignment, the assignee becomes the owner of the policy. Answer to TY 2 The correct answer is A. A witness is generally not required to sign the nomination papers. Answer to TY3 The correct answer is A. The higher the policy term, the lower is the surrender value factor.. Answer to TY4 The correct answer is C. The minimum duration of a loan against an insurance policy is of 6 months. Facebook Page Facebook Group Telegram Group 225 Self-Examination Questions Question 1 When can nomination be done? Before the issue of policy, while filling the proposal form Any time after the commencement of policy Any of the above None of the above Question 2 In assignment, if the policy is assigned to a minor then ____________ has to be appointed: An appointee An assignor A guardian A legal heir Question 3 The period between the loan approval date and the anniversary date of the policy is known as_________ Deferment period Vesting period Broken period None of the above Question 4 The additional loan amount generally granted should not exceed what percentage of the surrender value? 80% 90% 100% Additional loan cannot be granted Facebook Page Facebook Group Telegram Group 226 Answer to Self-Examination Questions Answer to SEQ 1 The correct answer is C. Nomination can be done at the time of filling the proposal form or any time during the policy tenure. Answer to SEQ 2 The correct answer is C. In assignment, if the policy is assigned to a minor then a guardian has to be appointed. Answer to SEQ 3 The correct answer is C. The period between the loan approval date and the anniversary date of the policy is known as broken period. Answer to SEQ 4 The correct answer is B. The additional loan amount generally granted should not exceed 90% of the surrender value.