The purpose of opting for a life insurance is to ensure that the loved ones are taken care of financially in the absence of the policy holder. Proper nomination is important in a life insurance policy to ensure that the claim money goes into the right hands. A nominee can be defined as a person who is eligible to receive the benefits out of a life insurance policy in the event of the demise of the insured during the policy period. If the nominee you appoint is not a legal heir, you need to mention in your will that the proceeds of the insurance policy will be received by him. This is important if you want to prevent disputes during the settlement of the claim.
To appoint a nominee you need to fill the insurance plan’s application form. You will have to furnish details such as the nominee’s address, age and relation in the nomination form. In life insurance, nomination is mandatory. A nominee is designated as a trustee and receiver of the insurance proceeds. After the nominee has been appointed, the insurance company can transfer the claim amount to him but at the same time other legal heirs can make claims on the insurance amount. In case the nominee is the legal heir, he would be eligible to receive the insurance amount. When a beneficiary has been mentioned in the will, the nominee should transfer the insurance amount to the beneficiary.
The situation discussed above could give rise to disputes. This problem has been addressed by the new Insurance Act which has been recently amended. A new group has been introduced who are known as “beneficiary nominees”. This includes spouse, children and parents. Their role is that of a beneficiary as well as that of a nominee. Say for instance, a spouse is appointed as the nominee, the death benefit will be paid out to the spouse and the other legal heirs will not qualify for the insurance amount. This is an effective rule and it makes the process of nomination clear and more meaningful. The policy holder knows well in advance that a member nominated by him will receive the benefits in his absence.
However, it is important to note that the concept of “beneficiary nominee” does not exist in motor insurance. In cases of motor insurance, the insurer pays out the claim amount to the nominee who then hands it over to the legal heirs. Let’s understand this with an example. Angad was 30 when he applied for a life insurance policy. As he was a bachelor, he appointed his brother as the nominee. Sadly, at 40 Angad met with an accident and lost his life. After his marriage, Angad did not change the nominee in this policy. Post his marriage, now who will receive the death benefit? His brother or his wife? In this case, Angad’s wife is the legal heir of his assets. Hence, Angad’s brother is not the beneficiary of the insurance amount. He will have to arrange for transfer of assets to Angad’s wife as the nominee.
Administratively, it is always beneficial to have nominees assigned. In case the policyholder dies without appointing a nominee, the insurer will have to take the pain of identifying the legal heir. Absence of nominee details can result in disputes. It is important to note that the insured can mention multiple nominees where the sum assured is divided among them all. In case the nominee is yet to attain 18 years of age, the policyholder needs to mention an appointee. This is necessary as a minor is not eligible to deal with the claim.
As per the new rules laid down by IRDAI, change in nomination or cancellation will now come at a cost. Life insurers can now charge up to Rs.100 for modifications. If the policy has been obtained online the fees is Rs.50. This fees has come into effect from 1st April last year.
This sums up the rules which revolve around nomination in insurance policies. It is advised that you remain well-versed with the rules before appointing nominees to an insurance policy.