Assignment and Nomination of a Policy

Section 38(6) makes the date of that notice the ranking date. The date on which the notice is delivered regulates the priority of all claims under a transfer or assignment as between persons interested in the policy, and where there is more than one instrument, priority follows the order in which the notices were delivered. A dispute as to priority between assignees is referred to the Authority.

Section 38(7) requires the insurer, on receiving the notice, to record the fact and date of the transfer and the name of the transferee, and, on request and on payment of the specified fee, to grant a written acknowledgement, which is conclusive evidence against the insurer that it received the notice.

Section 38(8) states the effect of an absolute assignment. From the date of receipt of the notice the insurer must recognise the assignee as the absolute assignee entitled to the benefit under the policy. The assignee is subject to all liabilities and equities to which the assignor was subject at the date of the assignment, and may institute proceedings, obtain a loan on the policy or surrender it without the assignor's consent and without making him a party. The Explanation provides that unless the endorsement expressly indicates that the assignment is conditional under sub section (10), every assignment is deemed absolute.

Section 38(10) recognises the conditional assignment. An assignment made on the condition that the proceeds shall become payable to the policyholder or the nominee if the assignee predeceases the insured, or if the insured survives the term, is valid, notwithstanding any law or custom to the contrary. But a conditional assignee is not entitled to obtain a loan on the policy or to surrender it.

Section 38(11) deals with partial assignment. Where a policy is partially assigned, the insurer's liability is limited to the amount secured by the partial assignment, and the policyholder is not entitled to assign the residual amount payable under the same policy.

Section 38(9) preserves rights under assignments made before the 2015 amendment.

Nomination: section 39

Section 39(1) provides that the holder of a policy of life insurance on his own life may, when effecting the policy or at any time before it matures for payment, nominate the person or persons to whom the money secured by the policy shall be paid in the event of his death. Where a nominee is a minor, the policyholder may appoint a person, in the manner the insurer lays down, to receive the money during the nominee's minority.

Note the limit in that sub section. A nomination may be made only on a policy taken on one's own life. A person who has insured somebody else's life, as a creditor may, cannot nominate.

Section 39(2) provides that a nomination, unless incorporated in the text of the policy, must be made by an endorsement on the policy communicated to the insurer and registered by it, and may be cancelled or changed at any time before maturity by an endorsement, a further endorsement or a will. But until written notice of the cancellation or change is delivered to the insurer, the insurer is not liable for a bona fide payment to the nominee named in the policy or registered in its records.

Section 39(3) requires the insurer to furnish a written acknowledgement of having registered a nomination or a change, and permits a fee.

Section 39(4) is the interaction with assignment, and it is heavily examined. A transfer or assignment made under section 38 automatically cancels a nomination. Three provisos qualify it. An assignment to the insurer itself, in consideration of a loan on the security of the policy within its surrender value, or the reassignment on repayment, does not cancel the nomination but affects the nominee's rights only to the extent of the insurer's interest. An assignment to a third party in consideration of a loan likewise does not cancel the nomination but affects the nominee's rights only to the extent of the assignee's interest. And a nomination automatically cancelled by such a transfer revives in the circumstances the section provides.

Section 39(5) provides that where the policy matures during the lifetime of the life insured, or where the nominee, or all the nominees, die before maturity, the money is payable to the policyholder or his heirs or legal representatives or the holder of a succession certificate.

Section 39(6) provides that where a nominee survives the person whose life is insured, the money is payable to the survivor or survivors.

The beneficial nominee: section 39(7) and (8)

This is the most important change the 2015 amendment made, and it is what a good answer leads with.

Section 39(7) provides that where the holder of a policy on his own life nominates his parents, or his spouse, or his children, or his spouse and children, or any of them, the nominee or nominees shall be beneficially entitled to the amount payable under sub section (6), unless it is proved that the policyholder, having regard to the nature of his title to the policy, could not have conferred such a beneficial title.

Section 39(8) provides that where such a beneficial nominee dies after the life insured but before payment, the amount, or the share of the nominee so dying, is payable to that nominee's heirs or legal representatives or the holder of a succession certificate, and they are beneficially entitled to it.

Section 39(9) preserves the creditor. Nothing in sub sections (7) and (8) operates to destroy or impede the right of any creditor to be paid out of the proceeds of a life policy.

Section 39(10) applies sub sections (7) and (8) to all policies of life insurance maturing for payment after the commencement of the Insurance Laws (Amendment) Act, 2015.

Section 39(11) provides that where a policyholder dies after maturity but before the proceeds have been paid to him, his nominee is entitled to the proceeds and benefit of the policy.

So there are now two kinds of nominee. An ordinary nominee, who is merely a person to whom the insurer may validly pay and who holds the money for the estate; and a beneficial nominee within the section 39(7) class, who keeps it as his own, subject only to a creditor's right under sub section (9).

The exception for the Married Women's Property Act

Section 39(12) provides that the section does not apply to any policy of life insurance to which section 6 of the Married Women's Property Act, 1874 applies or has at any time applied.

Its proviso is the practical rule. Where a nomination in favour of the wife of the person who insured his life, or of his wife and children or any of them, is expressed as being made under section 39, whether or not on the face of the policy, section 6 of the Act of 1874 is deemed not to apply and never to have applied to the policy.

The two regimes are alternatives, and the choice matters. A policy under section 6 of the Act of 1874 creates a trust for the wife and children, and the proceeds are beyond the reach of the policyholder's creditors altogether. A beneficial nomination under section 39(7) gives ownership of the proceeds but leaves the creditor's right intact under section 39(9). The chapter on the life policy as property works out the choice.

Assignment against nomination

A worked example

Shirish Deodhar takes a life policy for fifty lakh rupees on his own life in 2016 and nominates his wife Aruna. In 2020 he borrows twenty lakh from a bank and assigns the policy to it as security, the endorsement recording that the assignment is by way of security for the loan.

The nomination is not destroyed. Section 39(4) says an assignment cancels a nomination, but the second proviso saves it where the assignment is in consideration of a loan: the nomination stands and Aruna's rights are affected only to the extent of the bank's interest.

Shirish dies in 2026 owing the bank twelve lakh rupees. The insurer pays the bank twelve lakh under its assignment and the balance of thirty eight lakh to Aruna. Because Aruna is a spouse, she is within section 39(7) and takes that thirty eight lakh beneficially, not for the estate.

Now suppose Shirish also owed a supplier fifteen lakh rupees. Section 39(9) preserves the creditor's right to be paid out of the proceeds, so the supplier may still pursue the money in Aruna's hands. Beneficial nomination defeats the heirs, not the creditors.

Change the structure. Suppose the policy had instead been taken under section 6 of the Married Women's Property Act, 1874 for the benefit of Aruna and the children. The proceeds would then be trust property from the outset, outside Shirish's estate and beyond the supplier's reach entirely. Section 39(12) makes the two regimes mutually exclusive, and this comparison is the point of the whole topic.

One more change. Suppose in 2020 Shirish had assigned the policy absolutely to his brother for consideration. The Explanation to section 38(8) deems every assignment absolute unless it says it is conditional, so the brother would have become the absolute assignee, entitled to sue, to take a loan and to surrender the policy without Shirish's consent, and section 39(4) would have cancelled Aruna's nomination outright.

What it does NOT mean

It does not mean a nominee inherits the policy. An ordinary nominee is a receiver for the estate. Only a nominee within section 39(7) takes beneficially, and even then subject to creditors.

It does not mean an assignment is complete when signed, so far as the insurer is concerned. It is complete on execution but is not operative against the insurer, and confers no right to sue, until notice is delivered: section 38(5).

It does not mean the insurer may refuse an assignment at will. It may decline only on the grounds in section 38(2), must record and communicate its reasons within thirty days, and the aggrieved person may go to the Authority under section 38(4).

And it does not mean a nomination can be made on any policy. Section 39(1) confines it to a policy of life insurance taken by the policyholder on his own life.

Quick revision

Assignment, section 38. By endorsement or instrument, signed and attested by one witness, stating the fact, the reasons, the assignee's antecedents and the terms; the insurer may decline on the grounds in 38(2), with written reasons in thirty days and a claim to the Authority under 38(4); complete on execution but operative against the insurer only on notice, 38(5); notice fixes priority, 38(6); an absolute assignee may sue, borrow and surrender, 38(8); conditional assignment recognised but no loan or surrender, 38(10); partial assignment limits the insurer's liability and bars a further assignment of the residue, 38(11).

Nomination, section 39. Only on one's own life, 39(1); by endorsement communicated and registered, revocable by endorsement or will, 39(2); assignment cancels a nomination subject to three provisos, 39(4); the money goes to the estate if all nominees predecease, 39(5); to the survivors if any survive, 39(6).

Beneficial nominee, 39(7): parents, spouse, children, or spouse and children, take beneficially; 39(8) passes that beneficial title to their own heirs; 39(9) preserves creditors; 39(10) applies it to policies maturing after 26 December 2014; 39(11) covers death after maturity but before payment.

39(12): the section does not apply where section 6 of the Married Women's Property Act, 1874 applies, but a nomination expressed to be under section 39 in favour of wife or wife and children excludes that Act.

Test yourself

1. When does an assignment become operative against the insurer? On delivery to the insurer of written notice of the transfer with the endorsement, instrument or a certified copy, at the place where the policy is serviced. Until then it is complete between the parties but confers no right to sue the insurer: section 38(5).

2. What decides priority between two assignees? The date on which each notice was delivered to the insurer: section 38(6). A dispute as to priority is referred to the Authority.

3. On what grounds may an insurer decline an assignment, and what must it do? Where it has sufficient reason to believe the transfer is not bona fide, or is not in the interest of the policyholder or the public interest, or is for trading in policies: section 38(2). It must record and communicate its reasons within thirty days, and the aggrieved person may claim to the Authority within thirty days of that communication.

4. Who is a beneficial nominee, and what does that mean? A parent, spouse, child, or spouse and children, of the holder of a policy on his own life, nominated under section 39: by section 39(7) they are beneficially entitled to the money rather than holding it for the estate.

5. Does beneficial nomination defeat a creditor? No. Section 39(9) provides that nothing in sub sections (7) and (8) destroys or impedes the right of any creditor to be paid out of the proceeds.

6. Does an assignment always cancel a nomination? No. Section 39(4) says it does, but not where the assignment is to the insurer against a loan within the surrender value, nor where it is to a third party in consideration of a loan; in those cases the nominee's rights are affected only to the extent of the assignee's interest.

7. Can a nomination be made on a policy taken on another person's life? No. Section 39(1) confines nomination to the holder of a policy of life insurance on his own life.