LIC has worries over demat policies

Life Insurance Corporation of India (LIC) is having reservations over dematerialization of policies as it fears this could lead to unhealthy market of trading if checks are not placed on policies assignment.

The Insurance Regulatory and Development Authority have proposed that instead of issuing certificates of life insurance, companies could maintain electronic records in a central repository similar to the National Securities Depository Ltd. The insurance repository guidelines state that an insurer on receipt of intimation of assignment from the policyholder shall register the same in its record and intimate the insurance repository. Assignment is the process whereby a policyholder can transfer all benefits, including maturity and death benefits under a policy, to a third-person. Although life insurance contracts are not tradable securities like stocks or bonds, it is possible to get an upfront payment from a third-party who is willing to pay a price for getting higher benefits in future through assignment of the policy.

According to IRDA guidelines on the repository, the assignee shall have all the rights of the policyholder. The Life Insurance Council - an association of life insurers - has set up a panel of life company CEOs to look into the various concerns of insurance companies relating to the creation of an insurance repository.

Some years back Life Insurance Corporation was dragged to court by Insurance Policy Plus Services - a firm that specialized in taking over policies that had lapsed - after the corporation refused to assign policies. IPPS used to buy out policies which were in a lapsed state because of the sellers' inability to buy premium. These policies were acquired by making a payment to the policyholder and getting the revived policies assigned. LIC's objection was that any firm that bought policies for profit was acting against the principles of insurance. The corporation had no objection to policies being assigned as a security for a loan or out of love and affection for the assignee.

Trading in terminal policies is a controversial practice that is prevalent in the West. Practitioners of this trend say that they help the terminally ill policyholder by providing him with funds when he needs it the most. But critics point out that this practice amounts to taking bets on other people's lives.