LIC policies, Assignment and Bank Loans
Banks accept LIC policies assigned in their favour as security for loans to be sanctioned. A charge in favour of the bank over the LIC policy is created by assignment of LIC Policy.
Which are the types of LIC policies accepted by banks?
Banks normally accepts the following categories of policies:
a) Endowment Policies
b) Whole Life Policies (limited payments or otherwise)
c) Joint Life Policies
Some banks accept Children’s Deferred Assurance policies after the policies are adopted by the life assured on their attaining majority. Policies assured on the lives of minors are also accepted after the policies are assigned in favour of said minors on their attaining majority.
Which are the types of LIC policies not accepted by banks?
The following categories of L.I.C. policies are not accepted by banks, mainly because they are not assignable.
a) Children’s Endowment Policy
b) Children’s Deferred Assurance
c) Policies with nominations under “Married Women’s Property Act”.
d) Policies taken out especially for the purpose of Estate Duty and the like.
Whether policies of New Private Sector Insurance companies acceptable?
The Policies issued by new Private Sector Insurance Companies approved by IRDA, are accepted by banks, if
1. The insurance company issue surrender value certificate and
2. The policy is assignable in favour of the bank.
What is meant by assignment?
Assignment means transfer of a right over a property existing or future, or debt by one person to another. Life insurance policies and book debts are two classes of securities, rights over which can be transferred by assignment. Nomination under the Insurance Act is automatically cancelled on assignment. Hence nominees need not join the assignment process.
When a policy is assigned in favour of a bank, it can enforce the right by surrendering the policy to the policy issuer and obtaining the surrender value. This is done after serving a notice of demand on the assignor on default.
What are the conditions to be satisfied for assignment of policy?
1. If there is any existing assignment on the policy, it should be reassigned in favour of the assured.
2. The assigner should assign the policy in favour of the bank by executing the assignment form/ notice of assignment.
3. The bank forwards the policy along with assignment form/ notice of assignment to the insurance company for registration of the assignment in their books.
4. Insurance company returns the policy to the bank after noting the details in their records and the bank keeps the assigned policy in its files.
What happens on the death of assured before settlement of liability?
When a policy is assigned in favour of another person or bank, the assured is transferring all future rights over the policy in favour of the assignee. Hence, in case of death of assured before settlement of the dues of the bank, bank lodges its claim before the insurance company supported by the death certificate and the assigned policy. The insurance company releases the amount in favour of the bank.
What is insurable interest?
Insurable interest arises if beneficiary happen to sustain monetary loss as a result of the death of the life assured. Insurable interest is of a pecuniary nature.
Husband has an insurable interest in the life of his wife and vice versa
An employer has an insurable interest in his employee and vice versa.
What are the precautions taken by bank while accepting LIC policies?
1. The age of the assured is got admitted by the LIC.
2. The policy is an assignable policy and does not belong to the non – acceptable categories.
3. The surrender value and paid up amount of the policy is obtained.
4. The policy is in force and the premium is paid up to date by obtaining latest premium paid receipt.
5. No prior assignment exists/ all previous assignments are cancelled.
6. The assignment of policy in favour of the Bank is duly registered with the insurance company.
7. If the Insurance Policy offered as security is on the life of a person other than the borrower, the bank ensures that the borrower has an insurable interest in the life of the assured.
What is meant by re-assignment?
When the liability with the bank is settled/ closed and the borrower has no other liability with the bank, the charge over the policy should be released by the bank. This process is called re-assignment. This is done by obtaining a letter from the assured and by signing re-assignment form. Policy is also handed over to make necessary changes in the record of the insurance company.
