Difference Between Nomination and Assignment in Life Insurance

While understanding life insurance in the UAE, you may come across certain jargon that can be hard to understand. Among the most commonly discussed ideas is the concept of nomination vs. assignment in life insurance, which can confuse many. Understanding these terms is crucial as they play a ...read more

What is Nomination in Life Insurance?

If you have a bank account, you may be familiar with the word ‘nominee.’ Likewise, when a person buys a life policy, they appoint a nominee or beneficiary to receive the death benefits if they pass away during the policy term. Nominees are typically close family members such as a spouse, children, parents, or siblings. This makes sure the financial support reaches the intended loved ones.

Throughout their lives, the policyholder maintains ownership and control over the policy. The nominee, on the other hand, only becomes eligible to receive the death benefit upon the policyholder’s demise. It's essential for the policyholder to choose a nominee and provide accurate details to ensure the right person receives the financial support when they need it the most.

What is an Assignment in Life Insurance?

Assignment is the process through which the policyholder transfers the title, rights, and ownership of the life insurance policy to another person or entity. The person (usually a policyholder) assigning the policy is called the assignor, while the person to whom the policy is transferred is called the assignee. It’s important to note that an assignee could be a bank, a financial institution, or an individual.

An assignment is often done to use the policy as collateral for a loan. Once the policy is assigned, the assignee gets the legal rights to the policy benefits.

Let’s understand this with an example: you want to buy a house but have insufficient funds. In this case, you assign your life insurance policy to a financial institution, such as a bank, and use it as collateral to secure the loan amount. Now, the bank becomes the new policy owner. If the policyholder (assignor) passes away unexpectedly, the bank has the right to claim the death benefit. This way, they can recover the outstanding debt amount.

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What are the Types of Assignments in Life Insurance?

The life insurance assignment is categorised into two categories that are as follows:

Absolute Assignment

In an absolute assignment, all the rights of the policy are permanently transferred from the policyholder to another person or entity without any specific conditions. This is often done as a gift or by getting a loan.

Conditional Assignment

As the name suggests, conditional assignment means transferring the ownership and benefits of the policy to the assignee with certain terms and conditions. Here, the policy can only be transferred if all the conditions are fulfilled.

Difference Between Nomination and Assignment

Parameters	Nomination	Assignment
Definition	The policyholder selects nominees who will receive the death benefit in case of the policyholder’s death	Policyholder transfers the policy benefits and rights to another person or entity for a specific reason
Policy ownership	The ownership remains unchanged during the nomination The nominee holds no ownership rights over the life policy	The assignor transfers the policy to the assignee. It means the assignee has the policy ownership.
Purpose	Ensures life policy benefits go to a chosen person (nominee)	Usually done to secure a loan or gift the policy to someone else
Witness	No need for a witness	The assignment process is considered invalid without a witness
Right to sue	Nominee has no right to sue the life assured	Assignee can sue the assignor of the life insurance policy
Life cover	Nominee can claim the death benefit in case of the policyholder’s demise	Assignee is entitled to get the death benefit amount, as in this case assignee becomes a nominee

What are the Types of Nominees in Life Insurance?

Here are the following types of nominees under a life insurance plan:

Beneficiary Nominees

Beneficiary Nominee: A beneficial nominee is typically a close family member like a spouse, parent, or child.
Legal Right to Death Benefit: They are nominated by the policyholder and have the legal right to receive death benefits after the demise of the policyholder.
Immediate Family Only: Here, it is important to note that only immediate family members can be beneficiary nominees, and they can override other legal heirs.

Minor Nominees

Children as Nominees: You might think about the cases where people name their children as nominees.
Guardian’s Role: In such cases, if the beneficiary/nominee is under 18, a guardian must be appointed. The guardian manages the funds until the nominee reaches adulthood.
Protection for Minor: This ensures the benefit is protected and properly used for the child’s welfare until he or she is legally capable.

Non-Family Nominees

Non-Family Nominees: Policyholders can also nominate friends or distant relatives as beneficiaries of the life insurance death benefit.
Limitations for Non-Family Nominees: Non-family nominees cannot get death benefits directly; hence, it is generally not recommended.
Check with the Insurer: While nominating non-family members, check with your insurance provider to see if they offer this option.

Changing Nominees

Flexible Nomination: Life insurance allows you to change nominees anytime during the policy term. This is helpful if relationships change, like marriage, divorce, or the birth of a child.
Latest Nomination Wins: Keep in mind that the latest nomination registered with the insurer will be considered valid, and all the previous nominees should be replaced.

Multiple Nominees

Naming Multiple Nominees: Policyholders can name more than one nominee and assign them specific percentages of the sum assured.
Equitable Distribution: If the policyholder does not divide the share or percentage of life insurance benefits, the claim amount is distributed evenly between the nominees.
Fair Share: It provides equitable distribution among beneficiaries following the death of the policyholder.

Key Points to Know About Nomination in Life Insurance

Now that you have a clear understanding of the difference between nomination and assignment with the help of the above section, let’s explore a few more things about nomination in life insurance.

🔷A nominee can only be appointed if the policyholder and life assured are the same.

🔷If the policyholder and life assured are different, the claim benefits can be availed of only by the policyholder.

🔷There can be one or more nominees in a life policy.

🔷Nominees can be changed or updated multiple times. However, certain life insurance policies prohibit changing the beneficiary unless the nominee passes away

Key Points to Know About Assignments in Life Insurance

Keep the following things in mind related to the assignment in life insurance:

🔷Only the policy ownership is transferred with the assignment, not the associated risk.

🔷It is often used in financial transactions like securing a loan.

🔷Nomination can be cancelled through assignment only when the policy is assigned to an insurance company for a loan.

🔷 The assignment must be done through a written endorsement or assignment deed.

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✨ Wrapping it Up!

It’s important for a policyholder to understand the difference between nomination and assignment in life insurance. Both serve distinct purposes and offer unique benefits. While nomination ensures that the policy benefits go to a chosen individual after the policyholder's death, assignment involves transferring ownership, often for financial reasons like securing a loan. By understanding these concepts clearly, a policyholder can make informed decisions and maximise the value of their life policy without any difficulties.

Frequently Asked Questions

Yes, the policyholder can change the nominee anytime during the policy term.

Yes, but after the assignment, the nominee’s rights become secondary to those of the assignee. This is because the policy ownership is transferred to another person.

It’s required to sign an endorsement by the policyholder when transferring a life insurance policy to the assignee. Additionally, you need a witness to sign the paperwork to finish the process. You then explain the precise reason behind your transfer as well as any applicable terms and conditions. Furthermore, the assignee's information must be included in the assignment.

Assigning a nominee when purchasing life insurance is crucial since it ensures that they will get death benefits without any issues. It would be challenging for your family to receive financial help if you did not designate a nominee, and they might have to deal with a drawn-out court process to decide who receives the money.

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