It is a settled rule of law that anyone having an interest in a life insurance contract can transfer that interest, with or without consideration, to another person. Hence the contract need not (but frequently does) contain a provision expressly authorizing the owner to transfer his or her interest; it is an inherent right that can be restricted only by contract. Industrial life insurance policies contain limitations on the right of assignment, but ordinary insurance policies are generally free from restrictions other than requiring notice and making assignments subordinate to policy loans.

Consideration is a legal term that refers to something of value that is exchanged between two parties to a transaction. Anything that has value can serve as consideration. In a life insurance contract, the consideration exchanged is the policyowner�s money and the insurer�s promise to pay. A transfer without reciprocal consideration is a gift.

In the usual situation all ownership rights in a policy are vested in the policyowner (normally the insured). Among the incidents of ownership is the right to assign the policy. In addition to its contract law implications, the term incidents of ownership is extremely important for purposes of the federal tax law. According to IRC Sec. 2042, if the insured had any incidents of ownership in the policy during the 3 years prior to death, the policy�s death proceeds are included in the insured�s estate for federal income tax purposes. The right to assign the policy carries with it the power to transfer all rights and interests in the policy to another person. When someone other than the insured is the owner of the policy, it is customary for the policy to restrict the right of assignment to the owner. This is not a restriction on the assignability of the policy as such; it merely identifies the person who has the right to assign it.

The following are three sample assignment provisions:

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The person assigning the policy cannot transfer any interest greater than he or she possesses; nor can the obligation of the insurer be enlarged by an assignment. This means that the assignor of the contract cannot, by the unilateral action of assigning the contract, impair or defeat the vested interest of another party to the contract. In the typical case only one other party can be adversely affected by the assignment, and that is the beneficiary. But is the beneficiary�s interest entitled to protection against infringement? The answer depends on whether the beneficiary designation is revocable or irrevocable.

If the beneficiary designation is revocable, the majority rule is that the policyowner can assign the policy without the consent of the beneficiary and without complying with the formalities for changing the beneficiary designation. In some jurisdictions an absolute assignment is held to automatically extinguish a revocable beneficiary�s interest to the extent of the assignee�s interest. In other jurisdictions the revocable beneficiary�s interest is unaffected unless changed by the assignee. As might be expected, the majority rule reflects the decision of those courts that the interest of the revocable beneficiary is not vested but is a mere expectancy. The minority view is that the beneficiary has a vested interest in the policy, but that the beneficiary�s interest may be extinguished or terminated by the policyowner. This is known in the law as a defeasible vested interest. Courts that adhere to the defeasible vested interest theory hold that the policyowner cannot give the assignee an interest in the policy proceeds without obtaining the beneficiary�s consent or revoking the beneficiary designation.

It is the rule in all states, however, that when the beneficiary designation is irrevocable, the policy cannot be assigned without the beneficiary�s consent.

In the absence of a provision to the contrary, the beneficiary can assign his or her interest, both before and after maturity of the policy. Prior to the policy�s maturity, the beneficiary�s interest is virtually worthless because the insured has the right to change the beneficiary. If the insured does not reserve that right or if the designation of a beneficiary is irrevocable, there is something of substance to be transferred. However, even that irrevocable interest is contingent upon the original beneficiary�s survival of the insured, unless the beneficiary�s estate is designated (as contingent beneficiary) to receive the proceeds if he or she predeceases the insured.

Upon maturity of the policy, proceeds payable in a lump sum vest in the beneficiary and can be assigned by him or her. When the proceeds are held by the insurer under a deferred-settlement agreement, the beneficiary�s right of assignment is subject to the rights of the contingent beneficiaries, if any, and to restrictive provisions in the policy or settlement agreement. A common restriction for a policy or settlement agreement to contain is a spendthrift clause, which denies the beneficiary the right to commute, alienate, or assign his or her interest in the proceeds. Furthermore, in a few states the laws that protect insurance proceeds from the claims of the beneficiary�s creditors prohibit an assignment of the beneficiary�s interest.