Loan against Life Insurance Policies
A life insurance policy is a contract in which one party (the insurer) agrees give a certain sum upon the happening of a certain event contingent upon duration of human life, in consideration of the immediate payment of a smaller sum or certain periodical payments by another (i.e. the insured).
In our country life insurance business has been nationalized and it is being done by the Life Insurance Corporation of India. The Corporation issues several kinds of policies to suit needs, tastes and pockets of different persons.
1. The whole-life policy: Under this policy the premiums are payable throughout the life time of the life assured. The policy money is payable only on the death of the insured.
2. Endowment policy: Under this policy, the insured amount is payable to the insured on his attaining a specific age or on the predetermined date . in the event of his dying earlier, to his heirs or nominees.
3. Joint life policy: Where two or more lives are insured jointly, such policy is issued; Insure-d amount shall some payable upon death of any of the lives insured.
4. With or without profit policies: A “with profit” policy is one, holder of which is entitled to take the benefit or bonuses declared out of profits of the corporation usually after every two years. Bonuses will be to the vl1lue of such policies and shall be paid on their maturity. In case “without profit” policy this benefit is not available.
Life insurance policy is now considered by the banks as one of good securities on account of the following reasons :
(i) The policy can be easily assigned in favour of the bank. Of course, such assignment is to be duly got registered with Life Insurance, Corporation.
(ii) The valuation of the policy can easily be done. The Life Insurance Corporation of India can be requested to give the surrender value of the policy. Surrender value means the amount which the corporation will return to the insured out of the premiums paid by him immediately on his giving up voluntarily all his rights under the life policy.
(iii) The value of the security increases with the passage of time as more and more premiums are paid.
(iv) The security can be easily realized. The banker can get the money by surrendering the policy to the corporation.
Demerits of a life insurance policy as a security
(i) A contract of insurance is a contract of absolute good faith. The insurer may/repudiate the contract in case it is found that the insured obtained life insurance policy by concealment or misrepresentation of some material facts. In such an event the banker will not be in a position to recover its money.
(ii) The surrender value of the policy is paid only when the “insured pays premiums for a certain minimum period. Moreover. the policy will lapse if the insured discontinues payment of premiums. Thus, the banker has to run the risk regarding the non-payment of premiums.
(iii) Policy may contain certain onerous clauses such as ‘suicide clause’. Usually all life insurance policies issued by the Life Insurance Corporation of India provide that in the event of suicide. the assignee can make the corporation liable to the extent of his beneficial interest in the policy provided :
(a) the assignee proves to the corporation’s satisfaction that he accepted the policy bonafide and for valuable consideration; and
(b) the assignee had given notice of assignment to the corporation at least one calendar month prior to the death.
Precautions to be taken by the banker
A banker should take the following precautions while accepting life
Insurance policy as a security:
(i) Nature of the policy: The banker should have a thorough scrutiny of the policy to determine the terms and conditions under which the policy has been issued particularly the onerous clauses-
(ii) The presence of insurable interest: The banker should see that the a insured had insurable interest in the person whose life has been insured at the when the contract was effected. An individual has interest in his own life ,and there is no limit to the sum for which he may assure his own life. Some instances where a Person has an insurable interest in the life of another are as follows:
(a) Wife in the life of the husband or vice versa.
(b) Son in the life of his father on whom he is dependent.
(c) Creditor in the life of his debtor to the extent of the amount of the debt.
(d) Surety in the life of his principal debtor to the extent of his guarantee
(e) Dependents to the extent of the support that they are receiving.
(f) An employer in the life of his employee during the course of his employment.
(g) A partner in the life of other partners during the subsistence of the partnership agreement
A person can obtain an insurance policy on life of another to whom he bears relationship recognized by law, to the extent of possible financial loss. Amount which can be recovered by the insured shall not exceed the value of interest in the life or lives insured.
(iii) Admission of ‘proof of “age’. The banker should see that the ‘proof’ of age’ has been submitted by the insured to the corporation and a note to that effect has been made in the policy. In case it has not been done, the banker should ask the borrower to get its proof of age so admitted.
(iv) Preference for endowment policies. The banker should prefer endowment policies to whole life policies. as there is a definite maturity date) in the case of endowment policies. In case of whole life policy the banker may have to wait for a long time, before it can recover its advance out of the proceeds of the policy.
(v) No prior encumbrances. It should be ascertained from the) corporation that the policy does not have any prior charge or encumbrance against it
(iv) Precautions regarding certain Policies. Certain policies cannot be legally assigned e.g. the policies coming under the provisions. of section 6 of the Married Women ‘ s Property Act create a trust in favour of the beneficiaries i.e. the wife and children of the insured. No advance should be given against in such policies.
(vii) Ascertainment of surrender value. The Life Insurance Corporation ‘I of India has prepared a manual which helps in ascertaining the surrender value of the policy. Alternatively, the surrender value can be found out. by a reference ” to the corporation. A margin upto 10% should be kept.
(viii) Assignment of the policy. The banker should get the policy assigned in his favour. According to section 38( I) of the Insurance Act, 1938, the .assignment can be made either by an endorsement on the policy itself or by a separate instrument signed in either case by the transferor or his duly authorized agent and attested by at least one witness specifically setting forth the fact of
According to section 38(2) of the Insurance Act. the transfer or assignment is not to be operative as against the insurer and is not to confer upon the transferee or the assignee or his legal representative any right to sue for the amount of such policy or the money secured thereby until a notice in writing of the transfer or assignment together with either the said endorsement on instrument itself or a copy thereof certified to be correct by both the transferor and the transferee or their duly authorized agent has been delivered to the insurer. Consent of insurer is not necessary for the validity of the assignment. In case the insured had made nomination under a life insurance policy, such nomination will stand automatically cancelled on policy being subsequently assigned.
(ix) Payment or premium: The banker should see that the payment of premium is being made regularly to the corporation by the borrower after-giving the policy as security to the bank for advance.
- Application for credit
- Accepted copy of sanction letter
- D. P. note
- Letter of arrangement.
- Letter of lien
- Life policy assigned in favour of bank and registered with the Insurance company.
- Policy surrender value certificate issued by the insurance company.
- Letter of authority to in favour of bank to pay the premium if needed.
- Age admittance certificate if not mentioned in the policy.
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