In case the life insurance policies assigned in favour of financial institution, the claim would be paid after 3 months of commencement, the claim would be admissible to the extent of the amount of the loan or actual sum assured, which ever is less, provided such notice of assignment was given.
What is an Assignment?
Assignment of a life insurance policy means transfer of rights from one person to another. The policyholder can transfer the rights of his insurance policy to another for various reasons and this process is called assignment. Types of insurance policies used for this purpose usually include an endowment plan, money back policy or a ULIP. Term plans cannot be used in case of assigning a policy.
E.g. Mr A buys a house for which he also needs a home loan of Rs. 25 lakh from bank. Mr A takes home loan against his life insurance policy of the sum assured of Rs. 25 lakh. To take a loan from the bank, he assigns his life insurance policy to the bank, and then the bank would pay out the loan money to him. If Mr A failed to repay the loan, then the bank would surrender the assigned policy and get their money back. The original policyholder will have to pay the premium before or on the payment due date and not the bank.
How the Claim is paid?
1. In the event of the death of the assignor, the assignee is paid first and the balance (if any) is paid to the policy’s beneficiary.
2. In the event policy had lapsed due to premium non-payment and policyholder makes up the payment backlog to bring the policy back in force. Two months later, policyholder commits suicide. The insurer will not be liable to pay the death claim to the nominee.
3. Death Benefit, if payable during the grace period, will be reduced by the outstanding policy premium.
Grace Period: You are allowed to pay premiums within 30 days from the premium due date. If a due premium is not received within the grace period of 30 days, your policy will lapse and the insurance cover will be ceased.
4. The third party interest clause protects the bona fide interests of a third party which has acquired interest in the policy through an absolute assignment by paying money to the policyholder. Example a housing company has given a housing loan of Rs. 15 lakh to the applicant on his life insurance policies (worth Rs. 20 lakh) that have been assigned to it as collateral security. Or, a bank has given an education loan of Rs. 10 lakh to a student, accepting his assigned life insurance policies (worth Rs. 15 lakh) as security. If the loanee commits suicide, the policy will not be totally void. The insurer will protect the interests of the assignee, viz. the housing company or the bank by repaying the loan. But please note that this notice of assignment should have reached the insurer at least one month before the date of death.