Life Policies as a Security for the Loan/Advance :
Purpose of Life Policy
A life policy is taken for two purposes:
(i) It is a source of income for the dependents of the assured in case of his death.
(ii) It is an ideal form of saving since along with income tax deduction on the premium, paid loans can be raised on the policies in times of need.
Advantages
(i) Life insurance business being highly regulated and permitted only to companies having sound financial health, the banker need not doubt the realisation of the policies, which will be done without any difficulty, if the policy and the claim are in order.
(ii) The assignment of the policy in favour of the banker requires very little formalities and the banker obtains a perfect title.
(iii) The longer the period for which the policy has been in force, the greater the surrender value. It is also useful as an additional security because, in the event of the borrower’s death, the debt is easily liquidated from the proceeds of the policy.
(iv) The security can be realized immediately on the borrower’s default of payment by surrendering the policy to the insurance company.
(v) The policy is a tangible security and is in the custody of the bank. The banker only has to ensure that regular payment of premiums is made.
Disadvantages
(i) If the premium is not paid regularly, the policy lapses and reviving the policy is complicated.
(ii) Insurance contracts being contracts of utmost good faith, any misrepresentation or non-disclosure of any particulars by the assured would make the policy void and enable the insurer to avoid the contract.
(iii) The person (proposer) who has obtained the policy must have an insurable interest in the life of the assured or the contract is void.
(iv) The policy may contain special clauses, which may restrict the liability of the insurer.
(v) When the banker accepts a policy coming under Married Women PropertyAct he must ensure that all the parties sign in the bank’s form of assignment.
(vi) There is facility to obtain the duplicate policy if the original is lost. This can be misused by persons by obtaining duplicate policies. Banker should therefore, verify that no duplicate policy has been issued and there are no encumbrances on the policy.
Precautions
(i) The policy must be assigned in favour of the bank and should be sent directly to the insurance company for registration and ensured that only authorized office of Insurance Company has noted assignment.
(ii) The bank should see that the age of the assured is admitted. (iii) The banker should ensure the regular payment of premium.