We buy Life Insurance to ensure our loved ones are taken care of financially when we are no longer there. Proper nomination in Life Insurance is important to ensure that in the event of death, the life insurance claim money goes into the right hands.
The rules for nomination in life insurance have changed for insurance policies maturing after March 2015. This change was brought about through the Insurance Laws (Amendment) Act of 2015 and it rewrites the rules for Nomination in Life Insurance under Section 39 of the Insurance Act, 1938, among others. If you have even one life insurance policy, you must surely understand this change. The good news is that the new rules for nomination in life insurance now ‘protect’ the nominees far more than earlier. Let’s quickly see how.
Basics of Nomination in Life Insurance
– A Life Insurance Policyholder may nominate a person or persons to whom money secured by the policy may be paid in the event of her/his death.
– If the nominee is a minor (less than 18 years of age), an Appointee (caretaker) needs to be declared who would, in case of the policyholder’s death during the minority of the nominee i.e. when the nominee is still a minor, receive the money on behalf of the nominee.
– Nomination in Life Insurance is allowed only when the Proposer (person applying for the policy) is same as the person whose life is insured.
Potential Negative Impact before the Change
1. Before the recent change in rules, when the policyholder nominates, she/he expected it to behave like a will which apportions wealth in a particular way. But that was just not how it actually worked. When the previous rules were in place, in reality, the nominee(s) of a life insurance policy was meant to receive the claim money benefit but the nominee was supposed to distribute the money to the insured’s legal heirs (if they were different from the nominees). That’s right! Most policyholders were not even aware of this, so don’t be surprised if you didn’t know about it as well. 🙂 Legal tussles in such matters could have meant delays in the claim money coming to the genuinely deserving party.
2. Earlier, if the policyholder dies after the policy term but before he gets the maturity benefit of the insurance policy, the nominee could not claim the amount.
New Rules : Concept of Beneficial Nominees
The new rules have introduced the concept of Beneficial Nominees, i.e. nominees of the kind which can directly use the benefit of claim money because of their family relationship with the deceased. Spouse, children and parents (not siblings, please note) are included as Beneficial Nominees. The reasons are pretty obvious – they are the direct dependents of the person who has taken the policy.
How can the New Rules affect you
1. If the policyholder nominates his spouse, children or/and parents, they would be Beneficial Nominees. As per the new rules, even if the legal heir of the deceased policyholder were to be different from any/all of the Beneficial Nominees, they would have no right on the money unless the legal heir can prove that the claim money is not beneficial to the nominees. Only the beneficial nominees have the right on the claim money. The real benefit is that for the policyholder, the uncertainty about whether his family members will indeed get the money after her/his death, has been settled for good. At the time of making the nomination in life insurance, the policyholder can now rest assured that if he is choosing Beneficial Nominees, the proceeds of the life insurance policy will work almost like a will and no one else can stake claim on the money. Do note, however, that policies under Married Woman’s Property Act (MWPA) are excluded from these new rules (which is good as well).
2. The nominee now also has right on the claim money if the policyholder dies after the policy period is over but before receiving the maturity benefit.
So here’s a summary.
Flexibilities in Nomination Process will Continue
- A policyholder can declare the nominee at the time of policy application, or any time later during the term of the policy.
- You can nominate anyone as a nominee – your spouse, your children, relatives, your friends, unrelated people, anyone. You need to provide details such as full name (as per the nominee’s documents), gender, address, age and the relationship between the nominee and you (if there is one).
- You can also nominate multiple people in a particular ratio, e.g. 40% to person A and 60% to person B.
- Even successive/alternate nomination in life insurance is possible. This is nothing but the nomination order. e.g. nominate the money to person A. If he is not alive at the time of claim, it can go to person B. If B is not alive as well, it can go to person C. All the names of A, B and C need to be declared upfront at the time of successive nomination in life insurance. This is the best way to nominate and it is highly recommended.
- The nominees can be cancelled or changed as many times as required within the policy period. IRDAI has notified that it would cost Rs. 100 for each change.
- The nominees’ details are generally printed or endorsed on the policy certificate – this is extremely important for it to pass the legal test. Else the nomination is clearly invalid.
To conclude, the new rules have retained everything that is good and have been modified only where it was required to be. They have been progressive and customer-centric – the nomination process is more meaningful now and outcomes of nomination in life insurance are much more likely to be as intended by the policyholder.