As you are aware, an "insurance policy" is considered a capital asset. The Institute of Chartered Accountants of India (ICAI) has suggested that life insurance policies be treated as a capital asset.
"It is suggested that life insurance policies be treated as a capital asset falling within the definition of "property" under Section 2(14) of the Income Tax Act. Indexation benefit (for premiums paid) will take care of inflationary impact, resulting in parity with other capital assets," ICAI said in its Pre-Budget Memorandum, 2022.
PLEASE NOTE: Life insurance plans that have a cash value component are considered an asset. Insurance is an expense to a business and is carried as a prepaid expense (paid in advance) under the head of current assets in the balance sheet of a company till it is paid.
LET'S DISCUSS
ASSET
Asset refers to the amount one invests in resources in order to earn value over time on their invested amount. Assets can be liquid (e.g., cash) or illiquid (e.g., private equity in a business). They can appreciate or depreciate.
Assets are of two main types.
- Tangible Assets: Assets that can be felt or touched, for example, home, jewelry
- Intangible Assets: Assets that cannot be touched, for example, patents, trademarks
Then, what kind of asset is insurance?
LIFE INSURANCE
Under life insurance, permanent life insurance policies like whole life insurance, universal life insurance, etc. that have a savings component as part of their insurance plan are considered an asset. Term life insurance, which is for a specific time period, does not have a cash value component and, as such, is not considered an asset.
BUSINESS INSURANCE
Insurance that is paid in advance is considered a prepaid expense under the current asset in the balance sheet of the company. Once the insurance amount becomes due, it is considered an expense.
Important Points to Consider
Insurance is generally considered an expense in business unless paid in advance.
Permanent life insurance plans with a savings component are considered assets.
WHETHER WE CAN TRADE IN INSURANCE POLICY?
Let's discuss with a DIVISION OF THE HON'BLE APEX COURT OF INDIA
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 8542 OF 2009
LIC OF INDIA... APPELLANT VERSUS
INSURE POLICY PLUS SERVICES PVT. LTD. & ORS RESPONDENTS
Hold that: In the absence of any such contractual term, the appellant cannot unilaterally vary the terms of the contract under the guise of a policy decision, thereby endeavouring to disallow transfers that are legally valid under Section 38. As Section 38 is mandatory, it is not open to the appellant to issue any policy decision that is contrary to it.
BRIEF FACTS:
1. The First Respondent is a company that is engaged, inter alia, in the business of accepting and dealing in the assignment of life insurance policies issued by the Appellant. The second respondent is the director and shareholder of the first respondent. The Third Respondent is a statutory authority established under Section 3 of the Insurance Regulatory & Development Authority Act, 1999, and is hereinafter referred to as IRDA.
2. The business of the first respondent is to acquire life insurance policies from policyholders by paying them consideration. The assigned policy is registered and recorded in the books of the appellant and is then further assigned to a third party for consideration. Upon registration in the books of the appellant, it could then be further assigned.
3. In January 2003, several branches of the appellant refused to accept notices of assignment lodged by the first respondent. A Circular was issued on 22.10.2003, the content of which is reproduced below for facility of reference:
"There have been reports in the press recently of the existence of firms that are in the business of buying insurance policies that are lapsed after acquiring paid-up value from the original policyholders by paying them an attractive sum over and above the surrender value. The firm then becomes the assignee and is entitled to all the rights of the policy, be it maturity claim/death claim, etc. The above practice, if it becomes prevalent, would not only undermine the real purpose of life insurance but also allow third parties to make windfall gains by such wagering contracts. Therefore, it is felt necessary to introduce measures to safeguard the principles of life insurance and the larger interest of our policyholders.
· If any agent/employee is found to be involved in assisting such companies in respect of data acquisition of lapsed policies for revival and subsequent assignment, strict action may be initiated against him.
· The branch offices would have to be more vigilant in case of revival of policies that have been lapsed for longer durations, say over 3 years. In such cases, strict control on non-acceptance of third-party checks, strict adherence to medical requirements, quality of medical examination, etc. would be required. Wherever it is clear that a TIP company is involved, the revival may be outrightly rejected.
· If there are a number of assignments in the same branch office or divisional office in favor of the same financial company, the nature of the business of the company may be investigated.
· If the branch office already has information that the nature of the business interest of the financial company is trading in insurance policies only, the assignments in favor of such a company may be declined.
· Such policyholders may be educated through a specially designed communication on the implications of "absolute assignments." This may be done to safeguard the interests of those who may become innocent victims of third parties indulging in this business.
The branches may be instructed to start sending the data on absolute assignment to the controlling divisions cause-wise to keep a vigil on trading of policies.
4. The appellant also stated in a letter to the first respondent that assignments in favor of companies that are only trading in insurance would not be permissible. The various complaints by the First Respondent elicited a response by IRDA dated 3.3.3004, in which it opined that the Appellant should register the assignments. The appellant, however, refused to do so and instead issued another circular dated 2.3.2005 reiterating the contents of the previous circular and laying down a procedure for "uniform implementation by all the offices of the corporation." A portion of this Circular is reproduced, as it lays down the rationale behind the refusal to register these policies:
"Life Insurance Policies, in general, are a measure of social security for the family members of the life assured, and in the absence of adequate savings or securities, these policies are often the only financial security available to the family members of the deceased life assured. The Government of India has guaranteed the Sum Assured with Bonus in all LIC Policies under Section 37 of the Life Insurance Corporation Act, 1956 to ensure the availability of financial security to the family of the deceased. In this connection, the Hon'ble Supreme Court of India in Life Insurance Corporation of India vs. . Consumer Education and Research Centre (reported in AIR 1995 SC 1811) has ruled that the LIC discharges important constitutional functions and the policies issued by it are a measure of social security for the family of the life assured.
Between April 2002 and July 2003, our offices at various places received several policies for registration of assignments in favor of some entities. Newspaper articles also appeared in September 2003 about some companies carrying on trading in insurance policies. The Corporation had to take urgent notice of such a remarkable spurt in the registration of assignments in respect of such policies, and the Corporation then noticed that these policies were being purchased and traded in like saleable securities of a stock market. It was also noticed by the corporation that the only purpose for which such assignment was being obtained was with a view to trading in them by further selling them, which could continue indefinitely without reference to the life assured.
The Corporation had noticed that this process of trading, without any reference to the life assured, is in the nature of speculation and weighing in as much as none of the subsequent assignees would have either the means or the inclination to find out whether the life assured was still alive. This, in turn, would mean that even if the life assured died a premature death, the policies would continue in circulation by means of such trading until its date of maturity, and the corporation would then have to pay the final/ultimate assignee the entire maturity amount/value instead of the family members of the life assured, benefiting thereunder and despite the fact that the death may have occurred several years prior thereto.
Such trading in the corporation's policies offends the very essence of the life insurance contract and leaves the family of the life assured totally unprotected in the event of death of the life assured. Hence, in order to prevent such speculation and wagering, which causes harm to millions of families all over India, the Corporation has taken a policy decision to refuse the registration of assignments that are in the nature of trading. For this purpose, the Corporation has evolved a procedure to identify such transactions so as to preserve and protect the interests of genuine policyholders of the Corporation and to leave untouched the genuine assignments by the life assured."
Write a petition before the Hon'ble Bombay High Court.
5. The First and Second Respondents before us filed a writ petition before the High Court seeking a declaration that the insurance policies issued by the Appellant are freely tradable and assignable in accordance with the provisions of the Insurance Act, 1938, and that the Circulars dated 22.10.2003 and 2.3.2005 and the actions of the Appellant in refusing to register the assignment of life insurance policies in favor of the First Respondent are illegal, null, and void.
6. The High Court, vide its impugned order, allowed the writ petition. It noted that life insurance policies are the personal, movable property of the policyholder and can be said to be an actionable claim within the meaning of Section 3 of the Transfer of Property Act. The High Court also recorded that the business of assigning such policies is prevalent the world over.
While noting that this Court in LIC of India vs. Consumer Education & Research Centre (1995) 5 SCC 482 has held that insurance is a social security measure, as was also reflected in the Statement of Objects and Reasons of the Life Insurance Corporation Act, 1956 (LIC Act), the High Court held that consequent to private entry into the business of life insurance it is no longer possible to contend that life insurance remained a measure of social security.
THE COURT HELD THAT: The appellant is the only player in the market who is refusing to accept such assignments. It was held that if the terms of the contract between the appellant and the insured barred assignment, the assignee would also remain bound by this covenant. However, in the absence of any such contractual term, the appellant cannot unilaterally vary the terms of the contract under the guise of a policy decision, thereby endeavoring to disallow transfers that are legally valid under Section 38. As Section 38 is mandatory, it is not open to the appellant to issue any policy decision that is contrary to it. The Circulars dated 22.10.2003 and 2.3.2005 were found to be illegal, and it was held that insurance policies are transferrable and assignable.
OBSERVATIONS & DECISION OF APEX COURT
The question for us to decide is whether insurance policies are freely tradable and assignable. To this end, it would be appropriate to reproduce Section 38 of the Insurance Act as it stood prior to its amendment in 2015:
"38. Assignment and transfer of insurance policies.
(1) A transfer or assignment of a policy of life insurance, whether with or without consideration, may be made only by an endorsement upon the policy itself or by a separate instrument, signed in either case by the transferor or by the assignor, his duly authorized agent, and attested by at least one witness, specifically setting forth the fact of transfer or assignment.
(2) The transfer or assignment shall be complete and effectual upon the execution of such endorsement or instrument duly attested, but except where the transfer or assignment is in favor of the insurer, it shall not be operative as against an insurer and shall not confer upon the transferee or assignee, or his legal representative, the right to sue for the amount of such policy or the moneys secured thereby until a notice in writing of the transfer or assignment and either the said endorsement or instrument itself or a copy thereof certified to be correct by both the transferor and the transferee or their duly authorized agents have been delivered to the insurer:
Provided that where the insurer maintains one or more places of business in India, such notice shall be delivered only at the place in India mentioned in the policy for the purpose or at his principal place of business in India.
(3) The date on which the notice referred to in sub-section (2) is delivered to the insurer shall regulate 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 of transfer or assignment, the priority of the claims under such instruments shall be governed by the order in which the notices referred to in sub-section (2) are delivered.
(4) Upon the receipt of the notice referred to in sub-section (2), the insurer shall record the fact of such transfer or assignment together with the date thereof and the name of the transferee or the assignee and shall, on the request of the person by whom the notice was given, or of the transferee or assignee, on payment of a fee not exceeding one rupee, grant a written acknowledgement of the receipt of such notice; and any such acknowledgement shall be conclusive evidence against the insurer that he has duly received the notice to which such acknowledgement relates.
(5) Subject to the terms and conditions of the transfer or assignment, the insurer shall, from the date of receipt of the notice referred to in subsection (2), recognize the transferee or assignee named in the notice as the only person entitled to benefit under the policy, and such person shall be subject to all liabilities and equities to which the transferor or assignor was subject at the date of the transfer or assignment and may institute any proceedings in relation to the policy without obtaining the consent of the transferor or assignor or making him a party to such proceedings.
(6) Any rights and remedies of an assignee or transferee of a policy of life insurance under an assignment or transfer effected prior to the commencement of this Act shall not be affected by the provisions of this section.
(7) Notwithstanding any law or custom having the force of law to the contrary, an assignment in favor of a person made with the condition that it shall be inoperative or that the interest shall pass to some other person on the happening of a specified event during the lifetime of the person whose life is insured, and an assignment in favor of the survivor or survivors of a number of persons, shall be valid."
This section has subsequently been amended by the Insurance Laws (Amendment) Act, 2015, and Section 38(2) now reads thus:
(2) The insurer may accept the transfer or assignment or decline to act upon any endorsement made under sub-section (1), where it has sufficient reason to believe that such transfer or assignment is not bona fide, is not in the interest of the policyholder or in the public interest, or is for the purpose of trading an insurance policy.
This, along with the other changes introduced in the Section, indicates that the law as it currently stands gives the appellant discretion as to whether or not to accept an assignment, provided its decision is predicated on the transfer or assignment being (a) mala fide, (b) contrary to the interest of the policyholder, (c) against public interest, or (d) only for trading in the policy. The question before us, however, is limited to the law as it stood prior to this statutory amendment.
DECISION: In our considered opinion, it is not open to the appellants to charter a course that is different from the postulation in the Insurance Act by means of its own circulars.
We need not go beyond mentioning the decision of this Court in Avinder Singh v. State of Punjab (1979) 1 SCC 137, wherein it has been held that the Legislature cannot efface itself by delegating its plenary powers unless the delegate functions strictly under its supervision. If the delegate is allowed to function independently, it would tantamount to "usurpation of legislative power itself."
This view came to be reiterated decades later in Agricultural Market Committee v. Shalimar Chemical Works Ltd. (1997), 5 SCC 516. This Court held that "the power to make subsidiary legislation may be entrusted by the legislature to another body of its choice, but the legislature should, before delegating, enunciate either expressly or by implication, the policy and the principles for the guidance of the delegates." The position that obtains today is diametrically opposite inasmuch as the statute permitted, at the relevant time, the assignment and/or transfer of life insurance policies, but the delegate, through its Circulars, has attempted to nullify that provision of law.
We conclude, therefore, that the circulars are ultra vires the statute and must therefore be made ineffectual.
We also think that it is not appropriate to import the principles of public policy, which are always imprecise, difficult to define, and akin to an unruly horse, into contractual matters. The contra proferentem rule is extremely relevant inasmuch as it is the appellant who has drafted the insurance policy and was therefore well-positioned to include clauses, making it specifically impermissible to assign policies.
In the absence of any such covenant, the appellant cannot be heard to say that such transfers or assignments violate public policy. In any event, as we have seen above, the general global practice is to permit assignments of insurance policies.
It is for these manifold reasons and in view of the analysis of the law prior to as well as post the amendments carried out in the Insurance Act that we find the appeal to be devoid of merits.
The impugned judgment is well-reasoned and takes within its sweep all the relevant documents raised.
The appeal is accordingly dismissed.
CONCLUSION
The Apex Court-approved decision of the Hon'ble Bombay High Court held that, in the absence of any such contractual term, the appellant cannot unilaterally vary the terms of the contract under the guise of a policy decision, thereby endeavoring to disallow transfers that are legally valid under Section 38. As Section 38 is mandatory, it is not open to the appellant to issue any policy decision that is contrary to it. The Circulars dated 22.10.2003 and 2.3.2005 were found to be illegal, and it was held that insurance policies are transferrable and assignable.
RECENT DEVELOPMENTS
On August 13, LIC issued advertisements in national dailies seeking to caution policyholders against assigning their policies to third parties (such as ACESO).
Genesis of the legal battle
At the heart of the 'battle' is the concept of policy assignment, which allows policyholders to transfer their rights and benefits under the policy to an 'assignee', which in this case will be a trust established by ACESO.
Instead of surrendering—termining before maturity for reduced payouts—their policies to LIC, ACESO's offering allows them to assign their policies to the trust in return for a payout equal to the surrender value they would have received from LIC, as per the firm's website.
LIC maintains that the act falls under the realm of 'trading of policies', which is not permissible under law.
"This is nothing but trading in policies. It is against the interests of the policyholder who has sought protection, whatever the ACESO ads may say. In principle, we oppose this. We will explore all options.
Assignment or trading?
"Certain unregulated entities may be seeking to benefit at the cost of LIC's strong market position and sovereign guarantee, without any authorization or approval from LIC and at the cost of policyholders' interests," the LIC's advertisement says. It categorically states that the assignment option is being provided by unregulated entities with which LIC has no affiliation. "LIC believes that these products and services may pose a significant risk to policyholders' and their families' interests... are fraught with risks and may be prone to being misused," the advertisements claim.
The rebuttal follows advertisements placed by ACESO on August 5, inviting LIC policyholders to assign their endowment or money-back policies to the company instead of surrendering them to LIC. The life insurance behemoth's stance is that this amounts to the 'trading' of policies, which is not permissible under the Insurance Act of 1938 (amended in 2015).
"The insurer may accept the transfer or assignment, or decline to act upon any endorsement made under sub-section (1), where it has sufficient reason to believe that such transfer or assignment is not bona fide or is not in the interest of the policyholder or in the public interest or is for trading of insurance policy," section 38(2) of the amended Insurance Act states.
DISCLAIMER: The article presented here is only for sharing information with the readers. The views expressed are of a personal nature and shall not be considered as professional advice. In case of necessity, do consult with professionals.
CAclubindia
