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.
10 thoughts on “Nomination in Life Insurance – Great benefits from the New Rules”
Dear Ritu, if the policy is an MWPA policy, it will be considered like a Trust and there would be a Trustee. The easiest way is to find out from the insurance company itself because the policy would have been converted to an MWPA policy before it is issued. It can never be changed after that.
Let us know if we can be of any further help.
Hi mintwise, my husbands policy is registered under mwpa or not? How can l know about it?
We are sorry to hear about your loss.
While we will attempt to answer your query, since the matter is still sub-judice, please treat this as a general opinion and not specific to your case. Also, please consult your lawyer for an appropriate legal interpretation in this matter.
As the article mentions, the nominee for all Life Insurance policies that matured before 1st April 2015 would only be a caretaker of the funds and not necessarily one who the money really belongs to. So if you were the nominee, you would receive the money but only on behalf of all the legal heirs. The legal heirs would be as mentioned in a will, if it was made and registered. In the absence of a will, the legal heirs would be determined based on the Hindu Succession Act, 1956, a law that was passed by the Parliament of India in 1956 to amend and codify the law relating to intestate or un-willed succession, among Hindus. The Act was amended in 2005 by the Hindu Succession (Amendment) Act, 2005. It is also applicable to Jains, Buddhists and Sikhs.
The property of a Hindu male dying intestate, or without a will, would be first distributed the property to heirs within Class I. If there are no heirs categorized as Class I, the property will be given to heirs within Class II. If there are no Class I or II heirs, then the property will first go to agnates (distant blood relatives of male lineage) and if no agnates are available then to cognates (distant blood relatives of male or female lineage). And if there are no cognates then the estate will go to government.
The following relations are considered to be Class I heirs:
– Son/Daughter of a pre-deceased son (per-deceased means “already Dead”)
– Son/Daughter of a pre-deceased Daughter
– Widow of a pre-deceased son
– Son/Daughter of a pre-deceased son of a pre-deceased son (3 levels)
– Widow of a pre-deceased son of a predeceased son
The widow (or widows), mother and each of the children will take equal shares.
Going by these, it appears that the claim by your mother-in-law would be legally valid.
Disclaimer : This is only an opinion and based on the rules of insurance. There could be other regulations or rules or circumstances which may change the course of this conclusion completely, or perhaps alter it. You are strongly advised to check with your legal consul on this matter.
Hi mintwise, my husband expired in may 2014, I was nominee so got insurance claims but now after 2 years my mother in law filed a case against me demanding half of amount as a legal heir, however she is pensioner, agriculture land owner n property holder, will this new rule applicable to my case also, plz reply, my case is in court
There is no need to mention it in the will (but if you do, there is no harm either). You should get the nominee names endorsed in the policy document in the proportion you would like the policy proceeds to be split.
I want change nominee on my insurance policy first name will be my brothers name then my non family members is it required to make will for same and change of nominee should be on policy papers where blanks pace is left for endorsement or separate letter sent by company can be valid Pl guide
This rule is for life insurance products in general. We never mentioned it is for term insurance.
Please explain ” 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.” In a term insurance, policy expires on maturity, if you don’t die, right? If policy holder dies after maturity, it means no insured money. So how is this clause possible?
No Brajesh. There is no need to nominate again if the nominee is same. Only the treatment of nomination has changed at a rulebook level.
Hi mint wise. Good article. One thing I am not sure of. I have already nominated my wife for my policy when I took it in 2002. You have mentioned that all old policies are affected. now since rules are new, should i again tell LIC that my wife is the nominee?