Assignment vs Nomination in Life Insurance

In life insurance plans, Nomination and Assignment are the two important terms that are frequently used. Acknowledging these terms helps the policyholder to extract the benefits available under the life insurance policy without making a hole in his/her pocket.

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

What is the Nomination?

The nomination is a right given to the policyholder that authorizes him/her 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. The nomination is governed under Section 39 of the Insurance Act, 1938.

Types of Nominees

Under the 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 given below:

1. Beneficial Nominees

   As per the law, any immediate family member (like 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 to Know Regarding Nomination

• The 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/modifications to the policy.
• There can be more than one nominee in the policy.
• In the successive nomination, if the life assured appoints person A to be the first person to receive the claim benefits in case of 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, later 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/transferring the policy is called assignor, and the person/institution to which it is assigned is called the assignee. The assignment is regulated under Section 38 of the Insurance Act, 1938.

The assignment is categorized under two different types, i.e. Absolute Assignment and Conditional Assignment.

1. Absolute Assignment

   Under the 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 money consideration such as raising a loan, 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 the policy will be transferred.

Key Points to know Regarding Assignment

• Under the assignment, only the ownership is transferred/changed, not the risk of the policy. This means the life assured is/will be considered as the person insured.
• The assignment may lead to cancellation of the nomination in the policy only when it is done in favour of the insurance company due to a policy loan.
• The assignment applies to all the insurance plans except Pensions Plan and Married Women's Property Act (MWP).
• The 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. The 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.