Taking Cover. Why you must name a nominee

The purpose of life insurance is to provide financial support to the family when you are not around. But if you fail to nominate a person to whom the insurance cover has to go, you actually put your loved ones through a lot of hassle.

To understand the importance of nomination, you should know who a nominee is.

The nominee is the person chosen by the insured to receive the benefit in case of his/her death, giving the insurer a valid discharge on the settlement claim.

If you don’t have a nominee in your policy, though the sum assured will be paid to the legal heir (spouse, children and mother), it may take longer than usual for claim settlement.

According to Yusuf Pachmariwala, Senior VP and Head Operations, Tata AIA Life Insurance, “the insurer asks for succession certificate or heirship certificate to determine the rightful heirs and it takes time and involves expenses for the family members. This is not the ideal situation, given that the purpose of buying insurance cover is to ensure financial security of the dependants.”

In situations when there is more than one legal heir, it gets more complicated. The insurance company could ask for various forms or certificates such as indemnity bond, which may take time and sometimes result in dispute among the parties. If the deceased policyholder has written a Will, the insurance company will discharge the benefits to the person mentioned therein.

But in situations where nominee is provided in the policy but your Will holds a different person as a legal heir, the insurer will settle the claim to the person named in the Will, when contested. Thus, it is better to name the same person in your Will and as a nominee.

A nominee is usually the immediate family of the policyholder, such as spouse, children and parents but the policyholder can nominate anyone as the beneficiary. But if you nominate any person other than your immediate blood relation or legal heir, there may be a dispute in the family at the time of claim settlement.

“Blood relation or immediate family (spouse, parents, children) is accepted without question…others are questioned at the underwriting stage by insurance companies to eliminate a moral hazard”, says Yusuf Pachmariwala

It is best to provide details of your nominee at the time of going in for a life insurance policy. This will save your family headaches in future.

Puneet Nanda, ED, ICICI Prudential Life Insurance, says, “The registration process is simple and requires only details such as full name (as in official documents), age and relationship with the policyholder.” The policyholder also has the option to register multiple nominees wherein the sum assured is divided based on the percentage break-up provided by the insured.

In case of the nominee being a minor, an appointee or trustee should be provided. Puneet adds, “As per law, minors are not considered competent to enter into a contract and hence are not eligible to receive the claim proceeds directly. Should the need arise, the claim amount is discharged to the appointee.”

You can change your nominee any time during the term of the policy. The last update on the nominee details precedes all other existing ones.

According to Yusuf, “In case of nominee modification, a form has to be duly filled and submitted to the insurer while the policy is active and during the lifetime of the policyholder.

It is important that the insured policyholder reviews the nomination from time to time and makes changes based on important events such as marriage or death of nominee.” These days insurance companies provide the facility to update the nominee details online.

The nominee will receive the benefit of the policy in the event of the death of the insured but there are cases where this is not the norm. For instance, if you have taken a loan and provided your life policy as a collateral, then the policy has to be assigned. Yusuf says, “For an assignment, generally in housing loan cases, the owner of the policy has to give a notice to the insurance company, the company then registers the assignmentand the policy document is then sent to the assignee (the entity in whose favour the assignment has been done). For all practical purposes the ownership and benefits of the policyget transferred to the assignee. If the life insured dies, the policy claim is paid to the assignee.”

If the policy is re-assigned in favour of the insured, then fresh nominations have to be made by the policyholder.

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