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What is a Nominee in Life Insurance?

TeamAckoMay 13, 2024

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.

Nominee

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What is a Nominee?

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.

Let’s understand the Nominee with an example: 

Rajesh is a 45-year-old software engineer living in Bangalore with his wife, Sheela and two young kids. Rajesh wants to ensure his family is financially secure, so he purchases a ₹1 crore term life insurance policy. 

He knows that if anything happens to him, his wife may struggle to manage the house and pay for their children's education on her teacher's salary alone. Therefore, Rajesh decides to name Sheela as the nominee in his life insurance policy.

 This means that in the tragic event of Rajesh's passing away unexpectedly, Sheela, as the nominee, will receive the ₹1 crore sum assured directly from the insurance company. This payout can help Sheela settle debts, cover living expenses, and have enough money to continue funding the kids' education even without Rajesh around. 

Appointing his wife, Sheela, as the nominee gives Rajesh immense peace of mind that his family will stay financially protected if he is no longer alive.

4 Types of Nominees in Life Insurance

  1. Individual Nominee

  2. Multiple Nominees

  3. Contingent Nominee

  4. Trust Nomination

Individual Nominee:  

In the case of an individual nominee, you designate a single person, like your spouse, sibling, or child, to receive the policy payout. Naming an individual nominee keeps things clear on who'll get the money. But it also means if they were to pass before you, the funds would go through a legal process to determine the recipients.  

Multiple Nominees: 

You can nominate multiple beneficiaries to split the benefits between more than one person. Let's say you want 50% to go to your wife and 50% to be split evenly among your 3 kids. You'd list all 4 as nominees and the percentage due to each. This approach gives flexibility in distributing assets. However, upon the claim, each nominee has to provide proof of identity/existence before receiving their share.

Contingent Nominee:

Having a backup nominee can be useful. Contingent (or secondary) nominees come into the picture if the primary nominee passes before the policyholder. So you could name your spouse as the main nominee and a sibling as contingent. That way, your assets will stay with the family no matter what.

Trust Nomination:

Naming a trust fund as a nominee allows better control over the distribution after you are gone. The trustee manages the corpus and can use it to care for dependents as you wish. Minors can't access a trust right away, so it prevents the money from getting squandered. However, the process and rules around trusts are more complex.

Choosing a Nominee for your life insurance policy: Who can you pick?

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 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 key rules to keep in mind when selecting a life insurance nominee.

1. Beneficial Nominee

Under the Insurance Laws (Amendment) Act of 2015, immediate family members such as your spouse, children, or parents are entitled to the claim amount as a beneficial nominee. It means they have the right to claim the death benefit over any other legal heir. Choosing a close family member as your beneficial nominee is wise since they are legally entitled to receive the claim amount.

2. Minor Nominees

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.

3. Non-family members as Nominees

In case you don't have any immediate family members, you can select 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, keeping your legal heirs informed about your nominee's choice is essential to avoid future disputes.

4. Multiple Nominees

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 distributing the policy's benefits.

5. Modifying the Nominee

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.

6. No Nominee

If you haven't appointed a nominee for your policy or if the nominee you selected earlier is no longer alive, the death benefit payable under the policy will be disbursed to your legal heirs or authorised legal representatives.

Importance of Naming a Nominee

  1. Smooth Settlement of Claims: Designating a nominee facilitates the timely processing of claims and ensures that the benefits are smoothly transferred to the intended beneficiaries. This can help speed up the settlement of claims during a difficult time and minimise legal hurdles.

  2. Upholds Policyholder Legacy Plans: Nominations allow policyholders to specify who should receive the insurance proceeds after their death, thereby avoiding potential conflicts among heirs. This ensures that the policyholder's intentions regarding the distribution of assets are respected and legally upheld.

  3. Contingency Backup Option: Having alternate nominees provides a contingency plan in case the primary nominee is unable to fulfil their role. This helps prevent delays or complications in the settlement process and ensures that there is always someone authorised to manage the funds on behalf of the beneficiaries.

8 Things to consider while selecting a nominee for a life insurance plan

Here is a list of things to remember while selecting a Nominee for your Life Insurance Policy.

1. Relationship with the Nominee

The first and foremost factor to consider is your relationship 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.

2. Age of the Nominee

The age of the nominee is another crucial factor to consider. If you choose an elderly person as your nominee, there is a chance 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.

3. Financial dependents

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, choosing a nominee who can manage the finances efficiently and distribute the benefits among the dependents as per your wishes is important.

4. Health of the Nominee

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.

5. Nomination change procedure

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.

6. Personal and professional background

While selecting a nominee, it is vital 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 they can handle the financial responsibilities that come with the policy.

7. Communication and awareness

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.

8. Estate planning

Choosing a nominee with experience managing estates and distributing assets is important if you have a large estate. 

Also read: https://www.acko.com/life-insurance/life-insurance-estate-planning/

Difference Between a Nominee and a Beneficiary

The following table lists key differences between nominee and beneficiary in Life Insurance.

NOMINEE

BENEFICIARY

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.

Explore ACKO Life Flexi Term Plan

Talking about nominees, the ACKO Life Flexi Term Plan is a unique term insurance plan. It is packed with useful features and promises to provide your loved ones with a financially stable future with the amount of money you choose for them.

Besides the flexibility to customise your coverage throughout the policy duration, you have the freedom to adjust your policy tenure according to your evolving needs. Additionally, managing your nominee details has never been easier – you can effortlessly add, delete, or update nominee information as required.

Learn more 

Conclusion

Selecting a nominee for your life insurance policy is a crucial decision. You can select an individual, multiple, contingent, or trust nominee according to your preferences. By making this choice wisely, you ensure your loved ones are protected, and your wishes are respected

Frequently Asked Questions (FAQs)

Here are the answers to the given questions related to the what is a nominee in life insurance.

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Can a beneficiary be changed after the policyholder's demise in a life insurance policy? 

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.

Is it necessary for the nominee to be present during claim settlement in a life insurance policy? 

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.

What documents are required to appoint a nominee in a life insurance policy?

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.

Can a nominee be a non-resident Indian (NRI) in a life insurance policy?

Yes, a nominee can be an NRI. However, the nominee must provide their identity and address proof along with other relevant documents.

What happens if a nominee predeceases the policyholder in a life insurance policy?

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.

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