The most important point to be considered by the banker is the way in which the security is charged. A bank takes either an equitable or a legal mortgage. Let’s discuss how the security is charged by a bank.
How the Security is Charged by a bank
This is a very simple and inexpensive way of taking a life policy as security against the advance. All that is necessary is a deposit of the policy, together with a written undertaking on the part of the borrower to assign the policy, if and when called upon to do so.
In practice, a bank will rarely take an equitable assignment. In the case of an equitable assignment, an assignee cannot sue in his own name but will require the mortgagor’s assistance.
The usual and satisfactory way of taking a policy is to have it assigned to the bank by way of legal mortgage and the assignment duly registered in the company’s book. In order to acquire a legal assignment, the assignment must be in writing and endorsed on the policy or, by a separate instrument that must be completed and delivered by the policy owner to the assignee.
In the legal mortgage of the policy, the banker steps into the shoes of the assured and becomes eligible for all the benefits including, of course, to the bonus in “With Profit Policy”.
A written notice of assignment must be given to the insurance company who would be asked to record the assignment and send an acknowledgment confirming the assignment. All persons interested in the policy must join in the assignment. In the case of children, their names must be specifically mentioned, if the policy is for the benefit of any or all of the children assured.
All of them entitled to benefit, if of full age, must sign in the charge when it is executed. If any of the children is under-aged, the policy is not assignable, as minor has no power to give a valid assignment.
The effect of the assignment is that it
- Enables bank to sue in own name
- Binds the company to pay the bank
- Ensures priority for the bank over subsequent charge
- Enables the bank to acquire priority over an earlier assignee who has not been given notice to the insurance company provided that the bank is not under the actual or constructive notice of the earlier assignment.
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