Who Should Be Your Nominee in a Life or Term Insurance Policy in India?

At a Glance

• Introduction: Why picking the right nominee in insurance is crucial.
   
• What Is a Nominee?: Definition and role in life/term insurance.
   
• Nominee Types: Beneficial, minor, multiple, and non-family nominees.
   
• Who Should You Choose?: Factors to consider for your nominee.
   
• Legal Aspects: Rules under the Insurance Act, 1938.
   
• How to Appoint or Change a Nominee: Step-by-step process.
   
• Common Mistakes to Avoid: Tips for smooth claim settlement.
   
• Key Takeaways: Summary to guide your decision.

In India, life and term insurance policies are vital for securing your family’s financial future. A major decision is selecting the nominee in insurance, who happens to be the person who receives the policy benefits if you pass away during the policy term. The right nominee ensures your loved ones get the intended financial support without delays or disputes. This blog explores who should be your nominee, the types of nominees, and legal considerations under Indian laws, helping you make an informed choice.

What Is a Nominee in Insurance?

A nominee in insurance is an individual or entity designated by the policyholder to receive the death benefit of a life or term insurance policy in case of the policyholder’s untimely death. Governed by Section 39 of the Insurance Act, 1938, the nominee acts as a trustee or beneficiary, ensuring the sum assured reaches the intended recipients. The relationship with the nominee, whether a spouse, child, parent, or friend, plays an important role in determining claim rights and responsibilities.

Types of Nominees in Life and Term Insurance

Beneficial Nominee

As per the Insurance Laws (Amendment) Act, 2015, immediate family members like spouses, children, or parents can be beneficial nominees. They have absolute rights to the death benefit, overriding other legal heirs. This ensures clarity and prioritizes your closest dependents.

Minor Nominee

You can nominate a child under 18, but you must appoint an appointee in insurance, a major (18+) trusted person, to manage the funds until the minor reaches adulthood. The appointee ensures the responsible handling of the sum assured.

Multiple Nominees

Policyholders can appoint multiple nominees, specifying the percentage of the death benefit each receives. For example, you might allocate 50% to your spouse and 25% each to two children. This is useful for distributing funds across family members.

Non-Family Nominee

Friends or distant relatives can be nominees, but you must prove insurable interest (financial dependency). Non-family nominees receive the benefit as custodians, and legal heirs may claim rights unless a will specifies otherwise.

Read More: Does Term Insurance Come Under Section 80C or 80D? A Complete Guide

Who Should You Choose as Your Nominee?

Choosing a nominee depends on your family structure, financial goals, and trust in the individual. Here are key factors to consider:

• Financial Dependency: Nominate someone who relies on your income, like a spouse or children, to ensure they’re supported. For example, a sole breadwinner might choose their spouse to cover household expenses.
   
• Trust and Responsibility: The nominee should be financially responsible and capable of managing the sum assured. A trusted sibling or parent can be ideal if you’re unmarried.
   
• Age and Capability: Avoid nominating elderly parents who may struggle to manage funds or minors without an appointee.
   
• Family Dynamics: Consider potential disputes. Naming a spouse as a beneficial nominee often simplifies claims over distant relatives.
   
• Life Stage: Young professionals might nominate parents, while married individuals often choose spouses or children.

For instance, Rajesh, a 35-year-old married man, nominates his wife, Sheela, to ensure she can manage debts and their children’s education. He also names his minor son as a secondary nominee with his brother as the appointee in insurance to secure his son’s future.

Legal Aspects of Nomination in India

Nomination in India is governed by Section 39 of the Insurance Act, 1938, with amendments in 2015. Key rules include:

• Beneficial Nominee Rights: Spouses, children, or parents have priority over other heirs if named as beneficial nominees.
   
• Non-Family Nominees: They act as custodians unless a will grants them full rights.
   
• No Nominee Scenario: If no nominee is named or the nominee dies before the claim, the insurer pays the Class I legal heirs (spouse, children, or parents) per the Indian Succession Act, 1925.
   
• Will Overrides: A will specifying beneficiaries can override nominee rights, but nominees may still receive funds as trustees.
   
• Minor Nominees: An appointee must be named for nominees under 18.

How to Appoint or Change a Nominee?

Appointing or updating a nominee is straightforward:

1. At Policy Purchase: Provide nominee details (name, age, relationship, and share percentage) in the proposal form.
2. Post-Purchase: Submit a nomination form (available online or at the insurer’s branch) with updated details.
3. For Changes: Fill a change of nomination form, state the reason, and get insurer acknowledgment. Some insurers charge ₹50–₹100 for changes (IRDAI rules, 2024).
4. Minor Nominees: Include appointee details in the form.
5. Documentation: Submit ID proof, address proof, and policy details. 

Common Mistakes to Avoid

• Single Nominee Risk: Naming one nominee without a contingent nominee can complicate claims if they pass away. Add a secondary nominee for backup.
   
• Not Updating Details: Life changes (marriage, divorce, or death) require nominee updates. Failing to do so can lead to disputes.
   
• Ignoring Minor Nominees: Not appointing an appointee in insurance for a minor can delay claim payouts.
   
• Non-Family Nominee Issues: Without a will, non-family nominees may face legal challenges from heirs.
   
• Lack of Communication: Not informing nominees about the policy can cause delays during claims.

Choosing the right nominee in insurance is as critical as buying a life or term insurance policy in India. Prioritize financially dependent family members like your spouse or children, and consider their ability to manage funds. 

Use beneficial nominees for clarity, appoint an appointee in insurance for minors, and update nominations regularly. By making an informed choice, you make sure your policy’s benefits secure your loved ones’ future seamlessly. For more information, contact OneAssure!

Key Takeaways: