New Delhi: The Supreme Court will be guided as per RBI norms while deciding whether a lapsed life insurance policy can be revived by a third party for pecuniary benefits.
While hearing the plea of Life Insurance Corporation of India (LIC) challenging the trading of life insurance policies in the secondary market by private players, a bench headed by Justices S H Kapadia said, “We have to be bit cautious. We would see that it is within the purview of the RBI guidelines.”
The issue assumes importance as such trading, if it gets legal sanction, would give boost to the growing business of assigning insurance policies.
Acquisition and life insurance policies trading is a profitable business abroad. The US market is pegged at $143 billion (Rs5,72,000 crore), while in the UK it is £2 billion.
The court, while directing one of the respondents, Insure Policy Plus Services (India) Pvt Ltd (IPPS), a Mumbai-based bulk trader in insurance policies, to submit details about its income tax returns, balance sheets and documents related to other financial details, said: “No interim order. Contempt is stayed.”
Earlier, it had allowed the registration of assignments by Bachraj Finance Pvt Ltd, another respondent, on the condition that no further claims would be made by it.
IPPS, which acquires lapsed policies, said that the policyholder loses all the benefits under the policy including the death benefit.
“The assignment recorded is only for the financial value of the policy and the status of the policy whether live or lapsed has no relevance as no other benefits are accrued to the new assignee,” the affidavit filed by IPPS director Ketan Mehta stated.
Stating the job carried out by its registered company was legal, he said, “The company acquires only endowment and money-back policies issued by LIC. The policies constitute 80% of its business. These policies are purely in the nature of investments as the policyholder is entitled for bonus as an investment return on policy.”
The affidavit of Insure Policy came in reply to the LIC’s petition which opposed trading or mortgaging of its policies sold to policy holders.
IPPS, which buys insurance policies from policyholders and then sells it to banks and financial institutions, had dragged LIC to court over its official order banning such trade claims to have spent Rs35.8 million on the business and another Rs18.3 million on marketing and software development in the last four years.
Challenging the Bombay High Court judgement that ruled in favour of trading LIC policies, LIC said such illegal trading was opposed to the public policy and defeated the very object of the insurance policy.
It contended that the business would be detrimental to the interest of the policy holder as well as take away the security net provided for the widow or the dependent.
“None of the assignees has any insurable interest either at the time of the first purchase of the policy from the original policy holder... Such trader’s desire is to obtain the benefits of the policy at the earliest on the demise of the life assured or the maturity of the policy,” LIC counsel P S Patwaria and A V Rangam said.
Patwaria said IPPS’s business of trading in insurance policies was “speculative” and defeated the social purpose of the policy by making it akin to a fixed deposit.
According to LIC, transfer or assignment was a method by which a policyholder can transfer his interest in the life insurance policy to another person or institution.
It could be as security for a house loan or just emergency cash against the policy, it said, adding the benefits, in the form of tax exempted returns would go to the institution and can mean “windfall gains.”
The High Court had held that such policies were “movable property” and can be traded in by the policy holder.
Insurers, including LIC, have no option but to transfer or assign the policy once the policy holder gives a notice to the effect as provided under the Act, the court had stated while striking down two circulars by LIC that barred its policies from being transferred to a third party which traded in insurance policies.
“Whether the other policy holders would be denied a share in the surplus or assignee is entitled to windfall gains is irrelevant,” said the court and held that insurance policies were “movable property” and the policy holder was free to assign it for a consideration.