Understanding the role of a nominee in Life Insurance
Life insurance is an essential investment for anyone who wants to protect their family's financial future in the event of an unexpected tragedy. However, the process of purchasing a life insurance policy can be confusing, especially when it comes to the concept of naming a nominee. In this article, we will discuss what a nominee is in life insurance in India, why it is important to name a nominee when purchasing a policy, and the different types of nominees available, and more.
A nominee is a person who is designated to receive the benefits of a life insurance policy in the event of the policyholder's death. When you buy a life insurance policy, it is important to name a nominee to ensure that the benefits are disbursed to the intended recipient.
The nominee can be anyone - a spouse, parent, child, sibling, or friend. It is important to note that the nominee does not have to be a family member. Additionally, it can be changed at any time during the policy term, by submitting a written request to the insurance company.
There are different types of nominees available when purchasing a life insurance policy in India. They are as follows.
An individual nominee is a single person who is designated to receive the benefits of the policy.
Multiple nominees can be designated to receive the benefits of the policy. In this case, the benefits will be distributed among the nominees in the ratio specified by the policyholder.
A contingent nominee is someone who will receive the benefits of the policy only if the primary nominee predeceases the policyholder.
A trust can be designated as the nominee if the policyholder wants to distribute the benefits among multiple beneficiaries in a specific manner.
Typically, the process of nominating someone is completed while purchasing a life insurance policy. However, it can be altered during the policy term. Generally, people choose their immediate family members, such as spouses, children, parents, or siblings as their nominees.
As per Section 39 of the Insurance Act 1938, the policyholder is responsible for designating a nominee who would receive the coverage amount in the event of the insured's unfortunate passing. Thus, selecting the right nominee holds significant consequences for your loved ones.
Understanding the nominee's meaning and implications is important before finalising your decision. The nominee you choose must be someone you trust and have a close relationship with, as they will receive the benefit amount of your policy upon your demise.
Here are some reasons why naming a nominee is important.
If a policyholder does not name a nominee, the benefits of the policy will be disbursed to the legal heirs of the deceased as per the Indian Succession Act, of 1925. This can lead to legal complications and delays in disbursing the benefits.
Naming a nominee ensures that the benefits of the policy are disbursed to the intended recipient, who can use the funds to take care of their financial needs in the policyholder's absence.
Naming a nominee makes it easy for the insurance company to settle the claim. The nominee can simply submit the necessary documents and receive the benefits without any hassle.
When it comes to choosing a nominee for your life insurance policy, you have a lot of flexibility in terms of who you can select. Whether it's a family member or someone outside of your family circle, the person you choose will receive the death benefit in your absence. It's important to carefully consider your choice since your nominee will have a significant financial stake in your policy.
Here are some key rules to keep in mind when selecting a life insurance nominee.
Under the Insurance Laws (Amendment) Act of 2015, immediate family members such as your spouse, children, or parents are entitled to receive the claim amount as a beneficial nominee. It means they have the right to claim the death benefit over any other legal heir. It's wise to choose a close family member as your beneficial nominee since they are legally entitled to receive the claim amount.
Many parents choose to appoint their children as nominees to ensure their future is protected in case of an unexpected tragedy. However, if your children are below 18 years of age, they are legally considered minors. Therefore, you'll need to select a guardian who can oversee the claim and collect the proceeds on behalf of the minor nominee.
If your children are still minors when the settlement is made, the sum assured will be paid to the appointed guardian who will keep it safe until they turn 18. Choosing a trustworthy guardian is critical as they will be responsible for managing the funds for the benefit of your children.
In case you don't have any immediate family members, are single, etc., you have the option of selecting a nominee who is not related to you. This individual can be a friend or a distant relative. Nonetheless, it's important to note that if you choose a non-family member as a nominee, they will only act as a custodian of the death benefit, and your legal heirs can file a claim for the same under the policy.
By opting for a nominee who is not a family member, you can ensure that your death benefit is managed by someone you trust, even if they are not related to you. However, it's essential to keep your legal heirs informed about your choice of nominee to avoid any potential disputes in the future.
If you have multiple children or want to distribute the sum assured among various family members, you may choose to have several nominees. It allows you to designate a specific percentage of the sum assured to each nominee. By having multiple nominees, you can ensure that your loved ones are financially secure in the event of your untimely demise. Additionally, this approach can prevent disputes among family members regarding the distribution of the policy's benefits.
It is within your discretion to modify your nominee selection at any point before the policy comes due for payment. Thus, it is important to note that the most recent nominee designation will be granted the entitlement to receive the claim.
In case you haven't appointed a nominee for your policy or if the nominee you selected earlier is no longer alive (excluding beneficial nominee), the death benefit payable under the policy will be disbursed to your legal heirs or authorised legal representatives. Similarly, if the beneficial nominee has deceased, the death benefit will be granted to their legal heirs or authorised legal representatives.
Here is a list of things to remember while selecting a Nominee for your Life Insurance Policy.
The first and foremost factor to consider is the relationship you share with the person. The nominee can be your spouse, parents, siblings, children, or any other family member. Choosing someone you trust and have a strong bond with is important.
The age of the nominee is another crucial factor to consider. If you choose an elderly person as your nominee, there are chances that they might not be able to handle the financial responsibilities that come with the policy. On the other hand, if you choose a minor as your nominee, a guardian will have to be appointed to handle the policy until the minor comes of age.
Consider the number of financial dependents you have while selecting a nominee for your life insurance policy. Suppose you have a large family with multiple dependents. In that case, it is important to choose a nominee who can manage the finances efficiently and distribute the benefits among the dependents as per your wishes.
The nominee's health is an important factor to consider while selecting a nominee for your life insurance policy. If your nominee suffers from health issues, it might be difficult for them to manage the finances and take care of the dependents in case of your untimely demise.
Check the nomination change procedure of your life insurance policy before selecting a nominee. If you wish to change the nominee in the future, it should be a hassle-free process without any complicated formalities.
While selecting a nominee, it is important to consider their personal and professional background. The nominee should have a good reputation and no criminal record. Additionally, if the nominee is financially stable and has a good job, it will ensure that they can handle the financial responsibilities that come with the policy.
It is important to communicate with your nominee and make them aware of the life insurance policy's details and benefits. This will ensure that they are prepared to handle the financial responsibilities and distribute the benefits as per your wishes.
If you have a large estate, choosing a nominee with experience in managing estates and distributing assets is important.
The following table lists key differences between nominee and beneficiary in Life Insurance.
A nominee can be anyone, including a family member, friend, or even a trust.
The beneficiary can be anyone, including a family member, friend, or even a charity.
The nominee has no legal claim to the assets, and cannot sell or transfer them.
The beneficiary has a legal claim to the proceeds, and can sell or transfer them if they choose to do so.
If the deceased has not left behind a will, the nominee may be appointed by the court.
A beneficiary is typically designated by the policyholder or investor when the policy or investment is set up.
The nominee can be changed at any time, and the process for doing so is typically straightforward.
The beneficiary designation can be changed at any time, but the process may be more complex than changing a nominee.
No, a beneficiary cannot be changed after the policyholder's demise. However, if there are multiple beneficiaries, the benefits will be distributed among them as per the percentage specified by the policyholder.
No, the nominee doesn't need to be present during claim settlement. However, the nominee needs to provide the necessary documents to the insurance company to settle the claim.
To appoint a nominee in a life insurance policy in India, the policyholder must provide the nominee's name, age, address, relationship with the policyholder, and other relevant details. The nominee needs to provide their identity proof and address proof.
Yes, a nominee can be an NRI. However, the nominee must provide their identity and address proof along with other relevant documents.
If a nominee predeceases the policyholder in a life insurance policy in India, the policyholder needs to appoint a new nominee. If no new nominee is appointed, the benefits of the policy will be paid to the policyholder's legal heirs as per the succession laws applicable in India.
Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.