Assignment Vs Nomination in Life Insurance

Assignment vs. Nomination in Life Insurance

In life insurance plans, nomination and assignment are two important terms that are frequently used. Acknowledging these terms helps the policyholder to understand the benefits available under the life insurance policy.

Policyholders should know the exact difference between the two before making any decision to purchase a policy. It is required that individuals read the terms and conditions carefully so that one doesn't make any mistake and uses the policy in the right way.

What is Nomination?

Nomination is a right given to the policyholder that authorizes them to appoint a person (usually a close family member) to receive the benefits in the event of the death of the life assured. The person who is appointed by the policyholder to receive the benefit is called a nominee. Nomination is governed under Section 39 of the Insurance Act, 1938.

Types of Nominees

Under a life insurance policy, the policyholder nominates a person who is entitled to receive the benefits in case something happens to the life assured. Some of the different types of nominees are given below:

1. Beneficial Nominees

   As per the law, any immediate family member (like a spouse, children, or parents) nominated by the policyholder is entitled to receive the monetary benefits and will be the beneficial owner of the claim benefits. It is important to note that only immediate family members can be termed as beneficial nominees.

2. Minor Nominees

   Many individuals appoint their children as beneficiaries of their life insurance policies. Minor nominees (who are less than 18 years of age) are not considered eligible to handle claim amounts. For this, the policyholder needs to assign an appointee or custodian. The claim amount is paid to the appointee until the minor turns 18.

3. Non-Family Nominees

   These types of nominees can be distant relatives or even friends as the beneficiary of the life insurance policy.

4. Changing Nominees

   Policyholders can change their nominees as many times as they want, but the latest nominee should supersede all previous ones.

Key Points Regarding Nomination

• Nomination is possible only when the policyholder and life assured are the same. In case the policyholder and life assured are different, the claim benefits will be availed by the policyholder only.
• The nominee cannot ask for changes or modifications to the policy.
• There can be more than one nominee in the policy.
• In successive nomination, if the life assured appoints person A to be the first person to receive the claim benefits in case of the assured's death and person A is no more, then the claim benefits will be passed to person B. However, if Nominee A and Nominee B have passed away, then Nominee C will be appointed to avail the benefits, and so on.

What is Assignment?

Assignment of the policy refers to the transfer of rights, title, and policy ownership from the policyholder to another person or entity. The person involved in assigning or transferring the policy is called the assignor, and the person or institution to which it is assigned is called the assignee. Assignment is regulated under Section 38 of the Insurance Act, 1938.

Assignment is categorized into two different types: Absolute Assignment and Conditional Assignment.

1. Absolute Assignment

   Under absolute assignment, all rights, title, and interest are transferred by the assignor to an assignee without reversion to the assignor (in case of any event). It shifts the ownership of the insurance policy to other parties without any terms and conditions. This assignment is usually done for monetary consideration, such as raising a loan, or out of love or affection towards family members.

2. Conditional Assignment

   It means that the transfer of rights will happen from the assignor to the assignee subject to certain terms and conditions. If the conditions are fulfilled, only then will the policy be transferred.

Key Points Regarding Assignment

• Under assignment, only the ownership is transferred or changed, not the risk of the policy. This means the life assured is or will be considered as the person insured.
• Assignment may lead to cancellation of the nomination in the policy only when it is done in favor of the insurance company due to a policy loan.
• Assignment applies to all insurance plans except Pension Plans and those under the Married Women's Property Act (MWP).
• Assignment is effected through an endorsement on the policy contract.

Difference Between Assignment and Nomination

Let's discuss how assignment differs from nomination.

Nomination and assignment serve different purposes. Nomination protects the interests of the insured as well as an insurer in offering claim benefits under the life insurance policy. On the other hand, assignment protects the interests of an assignee in availing the monetary benefits under the policy. The policyholder should be aware of both of them before buying life insurance.