Nominee & Beneficiary - Life Insurance

Life insurance is a financial product that is meant to provide financial protection to your dependents in the event of your untimely death. The sole intention of availing the risk cover is to provide the financial security to the intended beneficiary. 

Easier said than done, the misconceptions over the beneficiary concept can create a lot of confusion. Before you avail any life insurance plan, it's essential to know 'who gets the claim'. 

Who Is A Beneficiary? - A beneficiary is the person or an entity who is entitled to receive the benefits under the policy in the event of policy holder's death or on the maturity of the policy. The beneficiary may be life-assured or his assignee or beneficial nominee or the legal heirs. Basically, a beneficiary is a person who has an insurable interest in the life of the policyholder. A beneficiary could be your spouse, parents, children or any person who has the rights as per the provisions of the will. If the will is not present, legal heirs are decided as per succession law.

At the time of availing a life insurance plan, the policy holder/life-assured are asked to nominate a person in the proposal form who will be entitled to receive the policy benefits in the event of his/her death. Insurance contract will be terminated on payment of benefits to the nominee. In legal terms, that's not the end of the story. If nominee is not the beneficiary, then nominee has to facilitate the transfer of benefits to the eventual beneficiaries as per the will or as decided by the succession law. Most of us are not aware of the significant difference between nominee and beneficiary. 

Nominee And Beneficial Nominee - A nominee is the person appointed to receive the death benefits from the insurance company and distribute it to the insured's legal heirs. Its nominee's responsibilities to ensure the benefit reaches the intended recipient. Hence, it's important to make the unambiguous nomination.

A nominee has to be an immediate family member such as a spouse, parents, children or any other dependent family member so that the purpose of insurance serves and the money reaches the intended recipients. Non-family members can also be beneficiaries if his/her name is included in the provisions of the will. A nominee holds no absolute rights on the benefits unless he/she is the beneficial nominee.

Let's take an example to understand this: Mr Chong has purchased a life insurance plan for 30 years at the age of 25. He has appointed his sister as a nominee to whom the policy benefits will be given on his untimely death during the policy tenure. Now, let's say Chong  gets married at the age of 30. Unfortunately, he dies in an accident at the age of 35. When it comes to insurance policy, he has not made any changes in the nomination. Now, the question is does the benefits go to his sister? Or does his wife get the benefits?

Insurance companies make the payout to the nominee - in this case, his sister. But legally, the sister is not the eventual beneficiary unless her name is stated under the provisions of will. Let's say Chong dies intestate (without writing a will), the beneficiary would be his wife as she is the first legal heir as per succession law.

Thus, appointing the right person is very essential. Ensure to nominate the eventual beneficiary while availing any life insurance plan. Disputes between nominees and beneficiaries can be settled through civil court, but it's a very lengthy process. Appointing the ultimate beneficiary as a nominee can make the claim process hassle-free.

There is a provision to change the nomination in the life insurance policy at any time during the policy tenure. Also, you can appoint multiple nominees with percentage of shares mentioned against each one of them.

To conclude, be clear and unambiguous while appointing a person to your life insurance policy. The person you appoint as nominee receives all the benefits during the unforeseen events. Know who exactly gets the claims and appoint the ones you intend to provide financial protection. Keep reviewing your policies and make necessary changes in nomination.