As a life insurance policyholder, one of the key decisions you need to make is choosing a nominee. Choosing the right nominee in insurance and keeping the information up to date are just as important as picking the right policy or sum assured. A mismatched or outdated nominee can delay claims, create family disputes or, in the worst-case scenario, send your hard-earned payout to the wrong person.
What is a Nominee in Insurance?
A nominee is the person entitled to receive your insurance claim amount if something happens to you during the policy term. This person will be the first point of contact for your insurer after your death. They will usually be the person who files the claim and receives the final payout from your insurance.
It is important to remember that a nominee is not always the same as a legal heir. Often, especially when the nominee is not a spouse, child or parent, the nominee may be required to distribute the funds to the rightful heirs in accordance with succession laws or a will.
Who Can Be a Nominee?
Insurers generally allow you to nominate:
- Family Members: These are usually a spouse, children, parents or siblings, as they are regarded as natural beneficiaries.
- Minor: A minor may also be a nominee; however, an appointee must manage the money until the minor reaches adulthood.
- Non-Family Members: There are some instances in which you are permitted to name a non-family member as the nominee, though with special reasons.
- Multiple Nominees: Many insurance companies allow multiple nominees, in addition to the normal one, with specified shares for each nominee.
Under Section 39 of the Insurance Act, 1938, a spouse, child or parent named as nominee is treated as a ‘beneficial nominee’ and can receive the payout directly, except for policies assigned under the Married Women’s Property Act, 1874. Other nominees generally receive the amount as a trustee on behalf of the legal heirs.
Why Choosing a Nominee Matters
Choosing a nominee matters just as much as updating it based on your life circumstances; here’s why:
- Faster Claim Settlement: With a clearly identified and up-to-date nominee, your family can be sure of a faster claim settlement process without delays.
- Lessens Legal Tangles: If there is outdated nominee information or a lack of clarity, there is a chance that family members will get into a legal tangle over whom the payment will be made, causing additional pain on top of the grief they already have.
- Your Loved Ones: The essence of nominating someone in insurance is to ensure that your close people receive the benefit, not any stranger or unexpected person.
- Life Changes: You may decide to marry, have a child or even go through a divorce; any of these can make your original nominee no longer appropriate. Insurance is a long-term commitment and your nominee details should evolve with your life.
What Happens If There’s No Nominee
Ignoring the nomination process altogether or failing to update it after the death of the nominee doesn’t mean that your insurance claim is not eligible anymore. Still, it certainly complicates your family’s situation a great deal:
- No Beneficial Nominee Selected: If you’ve failed to name a beneficiary, the life insurance death benefit will be payable to your legal heirs, legal representatives or any person holding a succession certificate from a competent court.
- Beneficial Nominee Has Died: If you have a beneficial nominee (your spouse, parent or child) who died before you and you didn’t update your policy accordingly, the death benefit will be paid to the legal heirs or legal representatives of your deceased beneficiary or to a succession certificate holder.
As you can see, in both cases, legal heirs typically need to establish their claim through documents such as a succession certificate, legal heir certificate, probate or letters of administration, depending on the insurer’s requirements and the case. This process can involve time, cost, paperwork and, in some cases, court proceedings, especially where multiple heirs are involved or disputes arise. This scenario is precisely what the nomination process should save you from and a strong reason to review your policy at once when the named beneficiary is no longer there.
When Should You Update Your Nominee?
Some instances would require you to update your nominee information:
- Marriage: Your spouse might become your nominee, replacing your parents or siblings.
- Birth of a Child: Your child is also eligible as a nominee along with your spouse.
- Divorce or Separation: You may have to reconsider your nominee information because the person nominated was your spouse.
- Death of Nominee: If your nominee dies before you do, updating will help prevent future problems.
- Change in Relationships: Changes in your relationships with family members can also be a reason to update your nominee information.
Common Mistakes Policyholders Make
Even a well-intentioned nomination can go wrong if you rush it or leave it incomplete. Here are the slip-ups that most often cause trouble later:
- Nominate a Minor without an Appointee: If the policyholder nominates a minor without appointing someone for them, there can be difficulties in making the claim.
- Choosing a Nominee Without Proper Consideration: Many people nominate a nominee to fulfil the policy requirement and do not even think about to whom the funds should be passed.
- Not Informing the Nominee: A nominee who is unaware of their status may forget to make a claim on time, delaying the whole process.
How to Update Your Nominee
Updating your nominee in insurance policy is quite easy. Here are 4 quick steps to follow:
Step 1: Get In Touch With Your Insurer
Get in touch with your insurer via their branch office, website or customer service to request the alteration of the nomination.
Step 2: Fill Out the Nomination Form
Generally, insurers offer an easy form that lets you update the nominee’s name, relationship, date of birth and share percentage if there is more than one nominee.
Step 3: Provide Necessary Documentation
Sometimes, you may need to provide identity proof for the new nominee, along with other supporting documents related to the alteration of the nomination.
Step 4: Verify Confirmation
Insurers generally confirm the update to their clients by sending a confirmation letter/document or a revised policy document.
Are Payouts to a Nominee Taxable?
Many nominees wonder about the tax implications of the payments made to them. Under Section 10(10D) of the Income Tax Act, 1961, the death claim of the policy made to the nominee is tax-exempt entirely, irrespective of the payment amount made to the nominee and there is no TDS deducted from this amount. In other words, the full sum assured will be paid to your family members free from any tax deductions. This further reinforces the importance of keeping nominee information up to date at all times.
Nominee vs Legal Heir: Key Difference
It is important to understand that appointing someone as a nominee does not make them the rightful owner of the claim amount. In accordance with Indian law, a nominee who is not a spouse, child or parent is generally treated as a trustee, holding the claim amount on behalf of the legal heirs rather than as the absolute owner.
Spouses, children or parents nominated under Section 39 of the Insurance Act, 1938, are treated differently, as covered above and may be entitled to the amount in their own right in many cases. This position was upheld by the Supreme Court in Sarbati Devi vs Usha Devi (1984), which held that a nominee is not the absolute owner of the claim amount unless they are also a legal heir. It would be wise to:
- Spell out your intention through a will.
- Communicate your intent with your family members so that there are no misunderstandings.
- Appoint your spouse or kids as your nominees wherever feasible, as they are generally your legal heirs too.
Conclusion
The nominee in insurance is not just a formality; it is an essential choice that defines who will receive the benefits of your years of hard work and savings. Everything in life changes, so the information about your nominees will change accordingly. Thus, by ensuring you update your nominee details after each significant life event; you will help your insurance policy work as intended.
Frequently Asked Questions
Can I change my nominee after buying a policy?
Yes. You can change your nominee at any time during the policy term by submitting a nomination change request to your insurer along with the required documents. Once the request is processed, the insurer will confirm the updated nomination in your policy records.
What happens if I don’t name a nominee?
If you do not nominate anyone, the claim amount will generally be paid to your legal heirs or legal representatives after the insurer completes the required verification process. This may involve additional documentation and can delay the settlement of the claim.
Can a nominee refuse to accept the claim amount?
Yes, a nominee can choose not to accept the claim amount. In such cases, the insurer will settle the claim according to the applicable legal provisions, which may involve paying the legal heirs or other rightful beneficiaries after the necessary verification.
Is it necessary to inform the nominee about the policy?
Although it is not legally mandatory, informing your nominee is highly recommended. This ensures they know about the policy, have access to the necessary details and can initiate the claim process promptly if the need arises.
Can I name more than one nominee for a single policy?
Yes. Many insurers allow you to appoint multiple nominees and specify the percentage share each person should receive. This helps ensure that the policy proceeds go to the right people according to your wishes and can reduce the chances of disputes among beneficiaries.