Assignment of Life Policy
The assignment of your life policy refers to the transfer of legal ownership of a life policy to a 3rd party. This is allowable under the Policies of Assurance Act. The transfer has to be done in writing, usually with the appropriate forms supplied by the insurer, and acknowledged by the insurer. Unless the insurer has reason to suspect that money laundering or fraud is involved, the assignment is very rarely rejected.
Being the legal owner of the policy will entitle the owner to the death benefit as well as the living cash value of the policy. All notices pertaining to the policy will be forwarded to the legal owner’s address. Depending on the reason for assignment, most of the time the premium is funded by the new legal owner. It is not legally wrong for the previous owner to continue to fund the premium even after assigning the policy to a 3rd party. This will be explained using 4 situations below.
Estate Transfer
One of the most powerful uses of the assignment of your life policy is to achieve your estate transfer objective. The most common estate transfer tool is the execution of a will. However, there can be situations where the transfer of your estate through a will can be inconvenient. For example, Peter is a faithful husband to his wife, Mary; and a filial son to June, his elderly mother. However, Mary and June do not have a good relationship. Many times, Peter has felt pressured when Mary and June quarrel over household issues. The situation is so bad that June has decided to shift to her other son’s house to live. Peter is caught in between. What will Peter’s estate transfer plan be like? If he were to use a will to distribute 90% of his assets to his wife, and 10% to his mother; Peter is unsure that Mary, being the executor of his estate, will honour his estate plan.
To solve this issue, Peter can assign a life policy, say $100K sum assured, to his mother while he is alive, and indicate “100% to wife” in his will. When Peter dies, his mother will be paid $100K from the life policy immediately, and the wife will inherit 100% of Peter’s estate.
In this case, Peter can leave something for his elderly mother without compromising his own family’s financial welfare; and more importantly, avoid a potential conflict between mother and daughter-in-law over his estate.
In this situation, Peter can continue to fund the premium even after assigning the policy to his elderly mother.
Estate Protection
The other powerful use of the assignment of your life policy is to achieve your estate protection objective. Michael saw a market potential for a business. While he has the technical knowledge and relevant connections to venture into business, he is concerned that if the business fails, it might consume his personal assets. Besides structuring his business as a private limited, Michael also assigns a few of his life and endowment policies to his wife. In this way, if his business fails, the cash value of his policies can be protected from business creditors.
Alternatively, if it is inconvenient to assign his life policies to a person, Michael can assign them to an asset protection trust. This is a better way of protecting the policies, but it incurs higher cost.
In this situation, it is better for the new legal owner of the policy to fund the premium. At the time of this writing, there is no stamp duty incurred when assigning a policy to a 3rd party or trust.
Estate Creation
It is common to see your elderly parents holding on to their life policies. This is not wrong, but sometimes paying the premium is an issue for the parents especially if they are not economically active. Instead of surrendering the policy, children can take over the legal ownership of the policy via assignment.
Because these policies could have been in force for many years, the accumulated reversionary bonus can be substantial. When the parent does pass away, the children can use the basic sum assured to clear the estate settlement cost, and the accumulated reversionary bonus can act as a refund of the premium paid by the children. In this process, the estate is being “created” by the assigned life policy.
In this situation, the children should fund the premium of the policy.
Planned Giving
Lastly, the assignment of your policy is very useful in planned giving. John is a businessman from Indonesia. He is a staunch Christian who routinely gives substantial money to the church where he worships. He plans to leave a meaningful financial legacy to the church when he passes on, but at the same time does not want to compromise his family’s financial security. John uses part of the annual giving to fund a whole life policy with reversionary bonus, and assigns the policy to the church. If John dies, the church will receive the death proceeds which consist of basic sum assured plus accumulated reversionary bonus. The church can, on her discretion, give the accumulated reversionary bonus back to John’s family. This could act as a refund of premium (partial or total, depending on the length of the policy) to John’s family, so as John’s family will not feel financially compromised by John’s planned giving intention.
In this situation, the donor should continue to fund the premium of the policy.
Most whole-life, endowment, investment-linked, term and universal life policies can be assigned to 3rd party.
