Life insurance: What is the role of beneficial nominee?

Life insurance policies provide financial security to one’s family in case the sole breadwinner dies. It is a great relief to know that your family’s future is well protected despite the odds. Hence, it becomes a potential candidate for your financial portfolio right from the word go. Now, when an insured person dies, their nominee becomes the receiver of the claim proceeds. However, the nominee cannot legally use the funds unless h/she is also the legal heir of the deceased. But this rule has been revised.

The amended Insurance Act, 2015 created a new category known as ‘beneficial nominees’. In case the parents, spouse, or children of the policyholder are nominated in the policy, their rights will supersede that of legal heirs, making the process smoother. This means if the policyholder mentions their beneficial nominee while purchasing insurance, this person becomes the end consumer of the claim fund.

The practice of appointing a nominee is followed while buying assets, insurance policies or other investments. In case the nominee is a minor (below 18 years of age), the policyholder is advised to nominate a custodian/guardian to receive the claim amount on behalf of the minor.

Nominee vs beneficial nominee 

Nomination enables the asset holder to nominate (propose or formally enter as a candidate) an individual to claim the proceeds upon his/her death.

“Anyone can be made a nominee for your investments. It doesn’t necessarily have to be a blood relation but ideally, someone who can be trusted with your money,” Shweta Jain, financial planner and founder of Investography said. However, a nominee is just a custodian/trustee/protector of the wealth he’s nominated for. H/she is liable to pass it down to the legal heir.

In case of death of the policyholder, the claim amount is payable either to the nominee or to the legal heir unless directed otherwise by a court of competent jurisdiction in India. But as per the new rule, if the insured person mentions their beneficial nominees in the proposal form, the claim proceeds are undisputed and go straight to the nominee.

The Insurance Act added the category of ‘beneficial nominee,’ which enables you to nominate any immediate relatives like spouse, children, parents or cousins. This means a beneficial nominee is the final and undisputed owner of the insurance benefits, unlike regular nominees.

Documents required

-Original policy document

-Death Certificate of the life assured issued by a local municipal authority

-Any other documents or information required by the insurer for processing of the claim depending on the cause of the death

Important points

If the beneficial nominee dies soon after the policyholder but before the latter’s insurance amount is paid, the share of the deceased nominee will be payable to the heirs or legal representative of the nominee or holder of succession certificate of such nominee.

In case when a nominee dies before the policyholder, the proceeds are payable to the policyholder’s heirs or legal representatives or holder of a succession certificate. However, the nomination can be cancelled or changed by the insured person any time before the policy matures.

The primary bone of contention has always been other legal heirs asserting their rights to the insurance policy’s proceeds over and above the nominee. Hence, with the inclusion of a ‘beneficial nominee’, the insured person can avoid this conflict.