Policy assignment
Also written Assignment of policy
The transfer of a policyholder's interest in a life insurance policy to another person, most often as security for a loan, which cancels an existing nomination unless the assignee is the insurer itself.
In plain language
A life insurance policy is not just a promise to the policyholder — it is also property that can change hands. Assignment is how that happens: it means transferring the interests in the policy to someone else.
The workbook's most common use for it is a loan. A bank or NBFC lending against a policy will typically insist on the policy being assigned to it, so that if the loan is not repaid, the lender has a direct claim on the policy. But assignment is not limited to loans — it can be done for other reasons too.
How it works
Assignment and nomination interact, and this is the exam point. An assignment cancels an existing nomination on the policy. The one exception: if the assignment is made to the insurance company itself, for a loan taken from the insurer, the nomination does not stand cancelled — it is only affected to the extent of the insurance company's interest in the policy. If the policy is later re-assigned back to the policyholder, the original nomination is reinstated.
Formalities. The insurer only recognises an assignment once it receives written notice, after which the assignment is recorded by way of an endorsement on the policy.
This sits alongside a separate 2015 change to nomination itself: the Insurance Act, 1938, was amended in 2015 so that a nominee who is the policyholder's spouse, parent or child inherits beneficially, rather than holding the money merely in trust for the legal heirs — a rule that still applies once an assignment is fully released.
A worked example
Illustrative figures. Mr Kapoor holds a life policy with a sum assured of Rs 50,00,000 and has named his wife as nominee.
He borrows Rs 8,00,000 from a private NBFC against the policy, and the NBFC requires the policy to be assigned to it as security. This assignment cancels his wife's nomination — until the loan is repaid and the policy is re-assigned back to him, at which point her nomination is automatically reinstated.
Compare this with a policy loan taken directly from the insurer itself: had Mr Kapoor assigned the policy to the insurance company for its own loan, his wife's nomination would not have been cancelled outright — it would only have been reduced to the extent of the insurer's Rs 8,00,000 interest, leaving her claim intact on the remaining sum assured.
Why NISM asks about it
Chapter 2 (Features of Life Insurance Products), section 2.4, "Facilities available under Life Insurance Policies," covers assignment immediately after nomination. Expect a question testing which kind of assignment leaves the existing nomination alive — assignment to the insurer for its own loan is the exception the question is usually built around.
Common exam traps
- Assignment cancels nomination — except when the assignee is the insurer itself for its own loan. That is the one carve-out, and it is the one most questions test.
- Re-assignment restores the original nomination automatically — it does not have to be filed afresh.
- An assignment is not effective against the insurer until written notice is given and endorsed on the policy. A private transfer agreement between two individuals is not enough by itself.
- Assignment is not limited to raising a loan — the workbook is explicit that it "can also be done for other reasons."