What is Nomination?
Nomination is the process by which the policyholder appoints a person or persons to receive policy benefits in case of a death claim. So in case of an eventuality, the life insurance company pays the policy proceeds to the appointed person - called Nominee.
Who can be a Nominee?
A nominee is appointed by the policyholder and can be anyone to whom the policyholder wants the financial benefits to accrue, in case of his/her death during policy tenure.
General practice is to appoint spouse, children or parents as the nominee.
Earlier, due to lack of regulatory clarity, there were confusions about the actual status of nominees - as legal heirs (other than nominees) too used to make claims on the money. To solve this problem and to ensure that the insurance money goes to the real and intended recipients, a concept of Beneficial Nominee was introduced in 2015.
As per the new law, if any immediate family member (like spouse, children or parents) is made the nominee, then they will automatically become the beneficial owners of the claim benefits and be referred to as ‘Beneficial Nominee’.
This means that the death benefit will be paid to Beneficial Nominees and not to any other legal heirs, irrespective of anything.
It is worth noting that only the immediate family members can be appointed as the Beneficial Nominees. Therefore, it’s always advisable to nominate an immediate family member as the nominee to ensure that there are no disputes in future between the nominees and legal heirs.
It’s a normal practice for people to appoint their children as beneficiaries of their life insurance policies. And rightly so; after all, its their future one wants to secure even if one is not around.
But children who are below the age of 18 years of age are not considered eligible to handle claim amounts. Hence, the policyholder needs to assign an appointee (or custodian).
In case of claim arising when the nominee (child in this case) is younger than 18 years, the claim amount is paid to the appointee for custody till the minor turns major.
This might sound strange. Why would you want to make a stranger (or non-family member) as the beneficiary of your life insurance policy?
This oddity is exactly what leads insurers to not accept strangers (or non-family members) as nominees.
So even though one can nominate distant relatives or even friends, fact is that it will be very difficult to prove ‘insurable interest’. This along with the fact that there is a moral hazard in appointing such a nominee, the insurance company might refuse the nomination or might ask for further explanations.
One should make sure that nomination of something as important as life insurance is up-to-date and in sync with whom policyholder actually wants to appoint as the beneficiary.
A policyholder can change the nominee as many times as he/she wishes but the latest nominee supersedes all previous ones.
Given the real purpose of life insurance, one cannot overstate the importance of appointing the right nominee. Therefore, ensure that you have the right person as your nominee. This will ensure that possible future disputes are avoided and the money is paid only to those whom you want.