A, an individual, has taken a life insurance policy for ₹ 5 lakh on his own life and nominated C as the nominee under the policy. Subsequently A assigned interest under the policy to S from whom he had borrowed ₹ 2 lakh.

As per Section 39(4) of Insurance Act, 1938, as a rule assignment of an Insurance Policy automatically cancels nomination subject to the exceptions given below: Where policy loan is taken from the Life insurer who issues the policy, as a pre-condition of sanction of loan, the policy has to be assigned in favour of the Life insurer. Under such circumstances, such assignment in favour of Life insurer does not automatically cancel subsisting nomination. But in the event of death while the loan subsists, the rights of Nominee is subject to satisfaction of the outstanding loan and interest and only the balance amount if any, can be paid to the Nominee. Similarly where the Policy is assigned by a Debtor (policyholder/Borrower/Assignor to Creditor (Lender/Assignee) as collateral security for the loan taken by the policyholder from the assignee the Nomination is not cancelled. Nominee get the residual amount if any, after satisfaction of the outstanding amount on death to the Assignee. Thus in the cited case C will get the residual amount (as he has been appointed as Nominee after the death of Mr. S) after payment to Mr. S of the outstanding debt of ₹ 2 lakhs with interest if any.