- Selection of nominee ensures that the life insurance company knows whom to pay the assured money after the demise of the policyholder
- In the absence of a proper nomination, the real beneficiaries are determined by various factors
“A stitch in time saves nine.”
This proverb aptly describes the importance of having a nominee in a life insurance policy.
While buying a life insurance policy, one has to nominate one or more persons who will be entitled to receive the benefits in case of death of the life insured. The nominated person is called a nominee.
The selection of nominee ensures that the life insurance company knows whom to pay the assured money after the demise of the policyholder. Since the nomination is not mandatory, many of us consider it just another formality and overlook its importance. However, a proper nomination not only enables fast processing of claims but also helps your loved ones to get the benefits of your policy when they need it the most and without any hassle.
What happens to life insurance policies without a nominee?
Life insurance products are designed to provide financial security to the dependents of the life insured. However, the absence of proper nomination does exactly the opposite. In case of demise of the policyholder, their dependent may have to run from pillar to post to claim the benefits. Increased paperwork only delays the process and increases the hassle.
In the absence of a proper nomination, the real beneficiaries are determined by various factors. Generally, insurers pay the claim amount to class I legal heirs such as son, daughter, widow, mother etc. If you have a will then the proceeds will be distributed as per the wishes that have been stated in the will, as per Indian Succession Act, 1925.
Alternatively, the insurance company may also ask for a succession certificate from the court of law which will state who should receive the claims. Gaining succession certificate from the courts is easier said than done. Your dependents need to go through a lengthy legal process and a lot of hassle to obtain the same.
In some cases, especially when there is more than one legal heir, the insurance company may ask for joint discharge statement, waiver of legal evidence and an indemnity bond to safeguard relevant party’s interests in case of any dispute regarding the settlement of claims.
In short, the absence of nomination can lead to devastating experience for your family at a time when they need empathy, love, and support.
Thus, your small effort and diligence today will save tons of efforts for your loved ones in the future.
New rules Favor Insurance Nominees
Previously, a nominee used to receive the death benefits and distribute it to the legal heirs. This led policyholders to believe that nominees will be the ultimate beneficiary in case of their death. But things have changed now.
According to recent changes in Insurance Laws (Amendments) Act, 2015, if an immediate family member such as parents, spouse or children has been made nominee, then they will be known as ‘beneficiary nominees.’ Beneficiary nominees are entitled to all insurance benefits in case of an unfortunate incident. It means that the insurer will pay the assured money only to the beneficiary nominee(s), and the benefits will not be distributed among other legal heirs.
In the new laws, the rules of Assignment have also been tweaked to benefit the nominees. An assignment is a process through which policyholders can transfer their rights to another person or entity. Earlier when you pledged your life insurance policy as collateral to a bank, the bank became the owner of the policy. After the death of the policyholder, the insurer pays the sum assured to the bank, and it was up to the bank to decide on how much they transfer to the nominee.
However, according to the new rules, nominee remains in case of the assignment of a life insurance policy. Thus, after the demise of the life insured, the insurer will pay the outstanding loan amount to the bank and pay the remaining amount to the nominee.