Nomination On Insurance Policies – Facts and New Changes. The nomination is a right conferred by the section 39 of the Insurance Act 1938 on the holder of a Policy of Life Assurance (on his own life) to appoint a person/s to receive policy money in the event of the policy becoming a claim by the assured’s death. As per the act, a nominee is a trustee and not the owner of the assets. In other words, he is only a caretaker of your assets. The nominee will only hold your money/asset as a trustee and will be legally bound to transfer it to the legal heirs.
An insurance policy is primarily supposed to protect the dependants of the life assured, financially, on the unfortunate event of his/her death. But as per the act, nominating someone shall not necessarily mean that the nominee would be the ultimate beneficiary of the insurance money. This naturally created confusion because policyholders thought that the nominees they specified would be the eventual beneficiaries if they died.
Insurance (Amendment) Act 2015 – New modification on nomination clause.
With the implementation of the Insurance (Amendment) Act 2015, the afore-mentioned lacunae have been effectively fixed. It protects the interest of the policyholder and facilitates the easy flow of the claim amount to the desired nominees. For that, it has brought in a new concept called beneficial nominees.
Beneficial Nominee Vs Ordinary Nominee
According to the new rules, when a policyholder nominates his immediate family members such as parents, spouse or children, then the nominee or nominees will be beneficially entitled to the amount payable by the insurer. In other words, if a beneficial nominee is available in the policy at the time of claim, other legal heirs will not have any claim on the money.
Further to add, the new rules give rights to the nominee to collect the insurance money even on the maturity of the policy in the event of the policyholder’s death. Before the amendment Act, a nominee had the right to collect the policy money only upon the death of the life assured during the term of the policy, but not if a policyholder survived till maturity, but died before getting the maturity corpus.
Nomination on Insurance Policies – Points to remember
- Nomination can be done only if the policyholder and the life assured are the same. Thus the nomination is not possible on the policies where life assured is a minor (where the policyholder is the proposer).
- When a nominee is a minor, an appointee may be appointed to receive the policy money in the of the death of the life assured during the minority of the nominee. The appointee should be a major person.
- The nominee will not be entitled to any right in the policy other than the claim amount in the unfortunate death of the policyholder. The policy continues to be part of the estate of life assured and he can deal with the policy in any manner without the consent of the nominee.
- The policyholder can make changes to the nomination any number of times according to his will.
- The nomination has to be done in the favor of a close relative only. Preferable in the favor of spouse and children. The underwriter may question the nomination, if not done in the favor of close relatives and will complete the policy if the answer provided is satisfactory.
- Policies which are issued under section 6 of Married women’s property act are out of the purview of sec 39 of insurance act. Hence nomination under MWP act policies is not possible. Policies having a nomination subsequently converted into married women’s property act, cancels the nomination.
- If a policy is financed from HUF, it would belong to the HUF entirely & policy money would be payable only to the Karta of HUF. Hence nomination cannot be made under a policy financed from HUF fund.
Nomination Vs Assignment – Key differences
|Nomination Vs Assignment|
|Basis for comparison||Nomination||Assignment|
|Meaning||Appointment of a person, by the policyholder to receive the policy benefits, on the event of the death of the policyholder||Transfer of right, title, and interest of the policy to another person.|
|Favor||Generally made in favor of immediate relatives||An assignment can be done in favor of any person or firm|
|Consideration||It does not involve consideration||It may involve consideration|
|Condition||No conditions specified||An assignment can be absolute with no conditions or conditionally based on the situation.|
|Who can make changes||A policyholder only can change a nomination||The assignee can further assign the policy if he enjoys full rights in the policy (Absolute assignment)|
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Anish L J is a ‘Financial Planner’ and member of Chartered Insurance Institute(CII), London and Insurance Institute of India. He is also a finance, insurance and software consultant. He thoroughly follows the developments in finance, insurance, and other related sectors.