Sell LIC policy and 'get money in 48 hours with life cover till maturity': Looks attractive? But beware of legal aspects, other rules

For Life Insurance Corporation of India (LIC) policyholders looking to exit their endowment policies, surrendering them to the insurer was the only option. Typically when you surrender a LIC policy after a few years, you get a portion of the premiums back as surrender value. Life-cover benefit stops immediately. However, a new player has entered the market with a claim of offering a potentially “more attractive” alternative. ACESO Endowment Services recently launched Assignment of Life Insurance Policies or ALIP, a one-of-a-kind programme designed especially for LIC policyholders contemplating surrendering their policies.

You can assign your LIC policy to ALIP and get the surrender value in 48 hours

When you surrender a policy to LIC, you lose the life-cover benefit and only get the surrender value. However, under ALIP, an LIC policyholder will not only get the surrender value of the policy if he assigns it to ACESO’s India Endowment Policy Trust, but will also continue to get life-cover benefits. In case he dies, the beneficiary will receive the life insurance cover amount. As he has assigned the policy to the Trust, he does not have to pay premiums anymore.

Let's say you took a LIC policy four years ago and have paid premiums regularly. Assume the surrender value will be Rs 1 lakh, which is a discontinued value. When surrendering you will receive Rs 1 lakh but lose all future life-cover benefits. When you opt for ALIP and assign the insurance to the Trust, you will get Rs 1 lakh within 48 hours, the company claims. Additionally, you continue to have the risk benefits until the policy matures as per the quotes given before the assignment is done without paying any future premium.

All LIC endowment life insurance policies (including money-back policies) can be surrendered under the ALIP programme, according to ACESO.

Also read:LIC asks shareholders to update PAN, bank details by this date to avoid higher TDS on dividends

ALIP: Life cover to continue even after you surrender your policy

You will get the life-cover benefit because your policy will remain active even after selling the insurance policy to the Trust. This happens because the Trust pays the premiums after you surrender these policies.

But why is ACESO doing this and from where does it get the funds to pay the policyholders who are surrendering their policies?

ACESO gets money from its investors. The Trust clubs the assigned (surrendered) policies to issue pass-through certificates (PTC) for investment to third parties. The company puts together assigned policies worth Rs 1 crore and issues PTCs, priced at an internal rate of return of 7.75 to 8% per annum, that will mature after 12 years.

In the event of the insured person's death, the nominee can claim the death benefit paid by LIC. The Trust will deduct the investment made on the assigned policy and the premium paid to the insurer while paying the death cover amount to the nominee. This is to ensure that the PTC investors get their returns at a predetermined rate.

Selling your LIC policy to ALIP? Know what LIC says

While it may look like a win-win product for all in the ecosystem — those who want to surrender their LIC policies, the insurer, and those who want to buy it and issue PTC to investors — , the Life Insurance Corporation is not okay with the arrangement. In a press release dated June 24, 2024, the insurer said, "Any sale/transfer or assignment of LIC policies need to be undertaken in accordance with Insurance Act, 1938, including Section 38 thereof. Under applicable laws, LIC may decline to act upon any sale/transfer or assignment of policies where LIC has sufficient reason to believe that such sale/transfer or assignment is not bona fide OR is not in the interest of the policyholder OR in public interest OR is for the purpose of trading of insurance policy."

LIC further said, "We urge all policyholders to exercise complete caution before making any decision on their policy which may jeopardise their financial security and the risk cover for their family."

This clarification from the insurer has raised several questions among policyholders and investors.

Is ALIP legal in India? Know what experts say before you opt for it

So is a plan like ALIP legal in India? Experts are largely confident that the plan is acceptable:

Sakate Khaitan, Senior Partner at Khaitan Legal Associates, says, "In India, there is no restriction on a company engaging in the business of accepting and dealing in assignment of life insurance policies. Under the extant regulatory position on assignment (Section 38 of the Insurance Act, 1938), there is no bar on transfer or assignment of an insurance policy provided the prescribed procedure is followed."

Nilesh Tribhuvann, Managing Partner, White & Brief - Advocates & Solicitors, says, "ACESO’s operations and product, ALIP, are firmly grounded in Indian law. The company adheres to Section 38 of the amended Insurance Act and the Supreme Court’s judgment from December 2015, which confirms the legality of assigning life insurance policies. This compliance ensures that ACESO has the legal authority to offer such a product, safeguarding the rights and interests of policyholders."

Kinjal Champaneria, Partner, Solomon & Co., says, "It appears from the official press statement issued by the company that the trust deed under which the policies are assigned by the policyholders to the Registered Trust prohibits the trading and further assignment as per Insurance Act, 1938. The Supreme Court of India’s judgment dated 29th December 2015 has permitted the offering of such products provided all the legal requirements and compliances under the Insurance Act, 1938 are followed."

Ketan Mehta, Founder and Director of ACESO, says, "A Supreme Court ruling reinforces that insurance policies are the personal property of policyholders and are considered movable assets and actionable claims under the Transfer of Property Act, 1882. ACESO launched ALIP to acquire life insurance policies through legal assignment, fully compliant with the SC judgment and as per the directive of IRDAI to LIC. Under this, policyholders assign their policies to a registered trust for valuable consideration, providing immediate liquidity while retaining life-cover benefits until maturity. The recent communication from LIC, which casts doubt on the credibility of such assignments, actually infringes on policyholders’ rights upheld by the apex court.

However, do remember that "the insurance company is given the discretionary right to accept or decline the assignment if 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 the public interest or is for the purpose of trading of insurance policy," Khaitan adds.

What LIC customers who are planning to surrender policies to ALIP should know?

What should policyholders keep in mind while surrendering their policies under ALIP? From the legal point of view, Khaitan says, "A customer looking to assign or transfer a life insurance policy is required to provide the insurer with the reason for the assignment/transfer. The customer should fully understand the terms and implications of the assignment and ensure that the insurance company is duly notified and updated about the assignment."

An insurance company has the right to accept or reject the assignment based on its assessment of the transaction. Manmeet Kaur, Partner, Karanjawala & Co, explains, "The insurer may accept the transfer or assignment or may decline the same 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 public interest or for the purpose of trading of insurance policy."

In case of rejection, the customer needs to be aware that he/she may continue to be responsible for the terms of the policy, says Champaneria. "Also, the assignee may initiate proceedings to recover any amounts paid towards the assignment, including interest from the customer," he adds.

Customers considering ALIP should exercise due diligence. It's crucial to verify the legal framework supporting the programme, including compliance with the Supreme Court ruling and the amended Insurance Act.

“While the programme offers legitimate benefits, understanding the terms of the assignment and ensuring proper documentation can protect against potential legal issues. Awareness and thorough research are key to making an informed decision," says Tribhuvann.

Abhishek Kumar, a SEBI-registered Investment Adviser and Founder of SahajMoney, says as the policyholders get the surrender value payout from the Trust to which they assign this policy within 48 hours, this looks like an attractive option. “But policyholders should look out for any clawback provision: if the life insurance company does not entertain the assignment, will the policyholders have to pay back this amount along with penalty to the Trust or its agents.”

For PTC investors of ACESO India Endowment Policy Trust

On a related note, LIC has categorically stated that it is not responsible for honouring such assignments as per its interpretation of the law; hence, investors who buy PTCs from the Trust should keep that in mind while handing over their money to the Trust, Kumar adds. "As per a Crisil Credit Rating report of 2023 for India Endowment Policy Trust, the first life insurance policy through PTC which will come for maturity with ISIN INE0M3D15095, will be in November 2025. So we will have to wait till then to know whether LIC honours the assignment or not." Crisil has given AAA (SO) rating to Trust's PTC.