Having a life insurance policy is essential for ensuring a better future for our dear ones. In case of unfortunate demise of the policyholder, the loved ones receive a pre – defined amount of money from the insurers. In order to keep this process hassle-free, special attention needs to be paid to the ‘nomination’ column. Every insurance policy with death benefits gives the option of nomination.
If you are one of those who consider nomination as just another formality instead of taking it as a matter of serious importance, then here are some crucial concepts that you should consider and hopefully they will help you realize the importance that proper nomination requires.
While applying for life insurance, the individual should mention the nominee details in the proposal form. The details of the nominee will basically include full name, age, address of the nominee and nominee’s relationship with the life assured. According to Section 39 of Insurance Act, 1938, one can have multiple persons as nominees and can also specify their shares of the policy proceeds in percentage terms.
Whom to Nominate?
The policyholder makes the decision on who shall be the nominee on his/her policy. The nominee could be his/her spouse, children, relatives or friends. Registration of unrelated parties as the nominee is usually not approved by the insurers since it quite often increases their risk, as the concept of insurable interest comes into question. Therefore, while technically you can nominate relatives such as uncles, aunts, nephews etc , it would be difficult to prove insurable interest and the company may refuse if the same is not properly established.
Subsequently the policyholder is required to present the following information to the insurer regarding the nominee — full name, address and age as mentioned in his/her official documents along with the details of relationship between the policyholder and nominee.
The insured can even opt for multiple nominations wherein the sum assured is divided among all the nominees depending upon the break up percentage decided by the policyholder.
The policyholder would need to provide an appointee if the nominee is yet to be 18 years of age. This is because a minor is not considered eligible to handle the claim amount or deal with documents and contracts.
Provisions to Change the Nominee
There are provisions to change the nominee during the policy term because the nominee is only required in case of demise of the insured. The simple process requires the policyholder to fill a form mentioning the name and information of the new nominee. The insured is also required to present the last valid nomination form when making the change. It is essential for the policyholder to have a written acknowledgment from the insurer after the form/application is filled. The latest nominee will supersede all the old ones. One can perform the process of changing the nominee any number of times during the policy tenure.
Change of nominee is mandatory in a scenario where the nominee dies before the insured and thus the proposer needs to create fresh nominations.
What if One Makes No Nominations in the Policy?
In case your policy fails to have a nominee, you need not worry, as the sum assured will be discharged according to the following rules -
The insurance company might dispatch the claim amount to Class I legal heir which includes- insured’s spouse, son, daughter and mother.
In case of a Will, the process is followed according to the Indian Succession Act, 1925 where the claim amount is distributed according to what has been stated in the Will. A succession certificate from the court will be required, to have a clarification on whom to handover the claim amount.
Whenever there is more than one legal heir, insurer intents are to safeguard their interest in scenarios of dispute on settlement of claim. For this, the insurer shall ask for an indemnity bond, joint discharge statement and waiver of legal evidence.
Common Nomination Mistakes
Here are a few common mistakes people make while appointing a nominee on their insurance policy.
1. Not informing the nominee
The first and most common mistake committed by a policyholder is not informing the nominee about his/ her nomination and the whereabouts of the policy documents. Generally the insured is reluctant to inform the nominee out of a feeling of some insecurity or might ignore the need of keeping him informed. But this will deprive them of the financial support they would require in the future in case of the unfortunate event of the policy holders death.
2. Not updating nominee details
Another issue is not revising / updating the details of the nominee periodically like his address, if any change in name or in a tragic scenario where the nominee does not survive. In such a situation you are not left with a backup. The policyholder has the right to change the nominee or the details n-number of times during the policy term just by filing the required form.
3. Appointing a nominee under 18 without appointee
Prefer a major person instead of a minor so that one does not require having any appointee in such a case. If there are circumstances where it is compulsory to mention a minor as a nominee then it is advised to offer genuine and complete details of the appointee which includes his / her name, address, relationship with nominee etc. And the appointee is in charge of the minor until he/ she turns 18.
4. Appointing Just One Nominee
Generally while entering details in the policy form, many of us mention just one nominee even after having more names in mind. This might be because of hurry or ignorance of the fact that nobody knows the future. God forbid if the nominee dies before the insured and the column is left unchanged in the policy documents, then there are numerous reasons which can create unnecessary delays in the distribution of the sum assured at the time of demise of the insured. Thus, a policyholder is recommended to mention more than one name in the nominee column with some defined percentage for each one. Remember to enter genuine details like full name, address and relationships with the insured.
5. Having Wrong Notions About Nominee Rights
Most of the people have a preconceived notion that a nominee has absolute rights. This is not true. If the nominee and the person to whom proceedings are bequeathed in a Will are not same, then a priority is given to the provisions of the Will over the rights of the nominee. In case a policyholder wants to give absolute rights to his/her nominee, he needs to prepare a Will and mention the beneficiaries thereof. It’s better to be cautious and have clarity on these matters in advance to assure financial protection of your loved ones.
Nomination VS Assignment
Nomination and assignment are the two such terms which a policyholder must be aware of to effectively manage the benefits accruing under a life insurance policy. Nomination is an act by which the policyholders authorizes another person to receive the policy money. The person so authorised is called a ‘nominee’. Nomination is a right given to the life insurance policyholder to appoint a person or persons to receive the benefit under the policy in case it becomes a death claim. Assume if a person who is insured dies, the nominee is entitled to receive the policy proceeds subject to certain conditions.
Assignment of a life insurance policy means transfer of rights from one person to another. The policyholder can transfer the rights of his insurance policy to another for various reasons and this process is called assignment.
The original policyholder who assigns the policy, i.e. transfers the rights, is called the “assignor” and the one to whom the policy has been assigned—the person to whom the policy rights have been transferred—is called the “assignee”. Once the rights have been transferred to the assignee, the assignor has no right on the policy, and the assignee becomes the owner of the policy.
One can usually come across an assignment where the policyholder is trying to use the life insurance policy as collateral against a loan he intends to raise. Assignment must be in writing and a notice to that effect must be given to the insurer.
While the nomination is an authorisation to receive the policy money in the event of the death of the life assured, it does not give the nominee an absolute right over the money received to the exclusion of other legal heirs. Further, the nomination can be changed any time during the lifetime of the policyholder. On the other hand, assignment of an insurance policy is a transfer or assignment of all rights and liabilities to the insurance policy in favour of the assignee.
Assignment of a life insurance policy
As mentioned earlier, transfer or assignment is a method of transferring ones transferable interest in a life insurance policy to another person or institution including as security for repayment of loans.
Assignment of a life insurance policy may be made by making an endorsement to that effect in the policy document. Another way of transferring or assigning the life insurance policy is by getting a separate assignment deed executed. The former case is a preferred mode of assignment as it is exempt from further stamp duty. An assignment should be signed by the ‘assignor’ or his duly authorised agent specifically stating the fact of transfer or assignment and attested by at least one witness.
The assignee acquires the complete title of the policy and can sue under the policy. He can further assign the policy and can surrender the policy if he so desires. The assignment once effected cannot be cancelled. In case of death of the absolute assignee the rights under the policy delve on the legal heirs of the assignee. It can only be reassigned.
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