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What is a Nominee in Life Insurance?
Life insurance is an important investment instrument often used to secure the financial future of one’s family in the face of unforeseen events. Yet many find it a complex process, especially when it comes to designating a nominee. This read aims to explain what is nominee in insurance in India. It highlights the importance of designating nominees, as well as their types, roles, and points to consider when choosing a nominee.
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Nominee in Life Insurance – Meaning and types
Table of Content
2. Types of Nominees in Life Insurance
3. Who can you choose as a nominee for your life insurance policy?
4. Who Can Be Your Nominee in Life Insurance?
5. Why Choosing a Nominee is Important?
6. Things to consider when choosing a nominee for a life insurance plan
7. Difference Between a Nominee and a Beneficiary
8. Do you need to name a beneficiary when buying life insurance?
9. Summary
What is a Nominee?
A nominee of a life insurance policy is any individual designated by the policyholder as the beneficiary of the policy in the event of the demise of the insured. Usually nominee is a family member, such as a spouse, child, or parent. One of the key features of life insurance is that the policyholder can designate one or more nominees at the time of purchasing the policy. Additionally, the policyholder may change or update their nominee(s) during the policy term as per policy guidelines.
Designating a nominee ensures that the financial proceeds from the policy are directed to the intended recipient. It lends them financial security and support during a difficult time. It is an important step in the life insurance process, offering clarity and security for the policyholder's loved ones.
Let Us Understand The Nominee With An Example
Here is an example to help you understand the nominee meaning in insurance.
Amit is a 42-year-old architect living in Delhi with his wife, Priya, and their two children. To secure his family’s future, Amit buys a term insurance plan with ₹50 lakh sum assured.
Amit realises that if he were to pass away unexpectedly, Priya might face difficulties managing their household and funding their children's education on her salary as a graphic designer. Hence, Amit decides to name Priya as the nominee in his life insurance policy.
This means that in the unfortunate event of Amit's death, Priya, as the nominee, would receive the sum assured of ₹50 lakh directly from the insurance company. This amount can help Priya pay off any debts, cover daily expenses, and continue supporting their children's education without Amit’s income.
By appointing Priya as the nominee, Amit finds peace of mind knowing that his family will be financially supported if he is no longer around.
Types of Nominees in Life Insurance
To fully understand insurance nominee meaning you must understand its types. There are different types of nominees in life insurance. These are categorised based on their designation and the manner in which the benefits of life insurance are distributed.
Individual Nominee
An individual nominee is a single person named by the policyholder who receives the insurance benefits. Typically, this person is a close family member, such as a spouse, child, or parent. The individual nominee ensures that the policy benefits go directly to the intended person, providing them with financial support in the event of the death of the policyholder.
Multiple Nominee
Multiple nominees involve naming more than one person to receive the insurance benefits. The policyholder specifies the percentage of the sum assured that each nominee will receive. This option is useful when the policyholder wants to distribute the benefits among several family members, ensuring that financial support is provided to multiple dependents.
Contingent Nominee
A contingent nominee is a secondary nominee who receives the insurance benefits if the primary nominee is unable or unwilling to accept the payout. This type of nomination provides an additional layer of security, ensuring that the policy benefits are still directed to a designated person even if unforeseen circumstances prevent the primary nominee from receiving them.
Trust Nomination
In trust nomination, the policy benefits are assigned to a trust instead of an individual. The trustee, who manages the trust, distributes the benefits according to the policyholder’s instructions. This type of nomination process is beneficial for policyholders who want to ensure the benefits are managed professionally and distributed according to a structured plan, especially when the beneficiaries are minors or require special care.
Who can you choose as a nominee for your life insurance policy?
Here are some rules for choosing your insurance nominee that you can keep in mind while selecting one:
Beneficial Nominee
According to the Insurance Laws (Amendment) Act, 2015, when someone selects immediate family members as the nominee for their insurance plan, the individual(s) is beneficially entitled to receive the claim amount over and above any other person, even if they are a legal heir.
This is why such a nominee is called a beneficial nominee. It is always suggested that you choose family members as beneficial nominees because this gives them an absolute right over anyone else to claim the death benefit.
Minor Nominee
Many times, parents who are also policyholders make their children their nominees. This approach helps safeguard the future of kids when parents are not around. But an important thing to remember here is that for minor kids below 18 years of age, you must have a guardian/appointee. This individual will oversee everything related to the claim, from receiving the proceeds from the policy to safekeeping/investing the same until your children turn 18. Once that happens, the guardian is obliged by law to pay them the money.
In such a case, it is very important to appoint someone who is trustworthy enough to manage this huge responsibility until your children are no longer minors.
Non-family members as Nominees
It is not necessary to always have family members as nominees. Policyholders may choose to appoint a non-family member nominee as well. This usually happens in the absence of immediate family or a lack of trustworthy family members around. In such a case, a friend, distant relative or a trustworthy senior employee is nominated as custodian of the death benefit. However, legal heir(s) can claim the death benefit in this scenario.
Multiple Nominees
Policyholders who wish to divide the sum assured among different family members or children can opt to have multiple nominees. In such a scenario, they also have the option to mention the percentage of division among each nominee.
Modifying the Nominee
The insured can change the nominees to their life insurance policy anytime before the plan matures for payment. However, it must be noted that when the policy matures, the last mentioned nominee or set of nominees will receive the benefit.
No Nominee
If you have not appointed a nominee in such a scenario, the death benefits from the life insurance policy will be payable to your legal heir(s) or the legal representative(s) or the succession certificate holder(s) appointed by a competent court.
Who Can Be Your Nominee in Life Insurance?
Your life insurance policy only allows people falling in the categories given below to be named as nominees:
Legal heirs
You can nominate your legal heirs, such as spouses or children. This ensures that the insured sum is received by the people you wish to secure and helps protect their financial future.
Immediate family members
You can also nominate your siblings, parents, or other family members. They receive the funds to ensure that the amount is well managed to protect the financial future of the person you wish to secure.
Extended family members or Friends
While policyholders can also nominate their friends, cousins or extended family members, it is required to seek the approval of the insurance company before doing so.
Why Choosing a Nominee is Important?
Here are a few reasons why it is important for a policyholder to choose a nominee:
Easy Settlement of Claims
Choosing a nominee ensures your claims are processed in a timely manner and that the benefits are received by the beneficiaries without any hassle. This helps to speed up the settlement process and reduces any legal trouble.
Maintains policyholder legacy plans
Choosing a nominee allows policyholders to specify the beneficiaries. This helps avoid all potentials conflicts that may arise among the heirs. It ensures that the decision of the policyholder in terms of asset distribution is legally upheld and respected.
A backup plan in case something goes wrong
Choosing alternate nominees creates a contingency plan in cases where the primary nominee is not able to fulfil their role. This ensures that there are fewer delays and complications and that there is always someone to manage the policyholder’s funds and assets.
Things to consider when choosing a nominee for a life insurance plan
It is important to carefully consider the right nominee for your life insurance plan. This helps ensure that the benefits reach the right person and eventually are put to the intended use as desired by the insured. Here are some points to consider when choosing a nominee for life insurance:
Nominee Age
It is important to consider the nominee's age. This is because it impacts their ability to manage and utilise the insurance benefits effectively. When you name a minor as a nominee, you may have to legally appoint a trustworthy guardian or trustee to manage the funds until the nominee reaches adulthood.
Relationship with the Nominee
The nominee should ideally be someone with a close personal relationship with you, such as a spouse, child, or parent. This ensures that the benefits will go to someone you trust to use the funds responsibly and in the best interest of your dependents.
Financial Dependents
When choosing a nominee, make sure they are either financially dependent on you or clearly understand the needs of your financial dependents. This ensures that the insurance payout is used to support those who rely on your income for their living expenses and future needs.
Health of the Nominee
This is an important criterion as well, especially when the nominee is expected to manage the funds over a long period. Choose a nominee who is likely to be in good health to handle the responsibilities that come with managing the insurance proceeds.
Nomination Change Procedure
Be aware of the procedure for changing your nominee in the future. Life circumstances can change, and you might need to update your nominee to reflect new relationships or changes in financial dependents. Ensure the process for making such changes is straightforward and understood.
Personal and Professional Background
Consider the personal and professional background of your nominee before designating. A nominee with a stable background is more likely to handle the insurance benefits wisely. Assess their financial literacy and ability to make sound financial decisions.
Communication and Understanding
It is crucial to have clear communication with your nominee regarding your intentions for the insurance benefits. Ensure they understand their role and responsibilities, and discuss your expectations to avoid any potential misunderstandings in the future.
Estate Planning
It is always advisable to integrate your life insurance nomination into the broader planning strategy of your estate. Consult a financial advisor or estate planner to ensure that your nominee designation is well-aligned with your overall plans for asset distribution. It must support your long-term financial goals.
Difference Between a Nominee and a Beneficiary
Let us understand what is nominee in insurance with respect to a beneficiary by understanding the difference between the two:
Aspect |
NOMINEE |
BENEFICIARY |
Explanation |
This is a person designated to receive benefits on behalf of the policyholder. |
This is an individual is legally entitled to inherit assets from a policy or will. |
Responsibility |
The nominee acts as a custodian to manage and distribute the assets as per the policyholder’s instructions. |
A beneficiary directly receives and utilises the benefits without intermediary obligations |
Designation Process |
Is named by the policyholder in insurance policies, bank accounts, etc |
Is designated in legal documents like wills, trusts, or insurance policies |
Applicability |
Applicable to various assets, including bank accounts and property. |
Usually linked to wills, trusts, insurance policies, and retirement plans. |
Succession/Continuity |
The role is not usually passed on. It is as per the legal instructions of the deceased. |
Can include alternate beneficiaries to ensure a smooth transfer of assets. |
Do you need to name a beneficiary when buying life insurance?
Yes, naming a beneficiary when buying life insurance is a very important and necessary step. The beneficiary is the person who will receive the policy death benefit in the event of the policyholder's death. By designating a nominee you can ensure that the financial support intended by you reaches the right person or entity. This helps them cover expenses, debts, and other financial needs.
Without a named beneficiary, the death benefit may be subject to probate — a legal process initiated by the insurance company to determine the rightful heirs. This may delay the payout and complicate the distribution process. Thus, specifying a beneficiary provides clarity and ensures the policy serves its intended purpose of protecting loved ones financially.
Summary
A nominee for a life insurance policy is someone who receives the death benefit upon maturity. Therefore, it is important to designate a person you love and care for as your nominee to ensure they are financially secure and taken care of in case of your demise. It is also important to change your nominee keeping in view your changing life situations. Some such situations could be the birth of a child, the death of a nominee, divorce, remarriage, etc. Remember, be proactive in this context, as the insurance provider is obliged to release the policy proceeds to the last-mentioned nominee(s). Designating a nominee is, therefore, an important responsibility that the policyholder must execute on time, with utmost caution and due diligence.
FAQs on What is Nominee in Insurance
Q. What is the meaning of nominee in insurance?
A nominee in insurance is the person appointed by the policyholder to receive the insurance benefits in case of the policyholder's death. This ensures that financial support is provided to the intended individual.
Q. What is the difference between a nominee and a beneficiary?
A nominee is designated to receive the insurance proceeds upon the policyholder's death, primarily to hold the money. A beneficiary, however, is a person with the legal right to utilise and benefit from the policy proceeds.
Q. Who is eligible for nomination?
Any individual can be nominated, but nominees are typically close family members like spouses, children, or parents. The policyholder must be of legal age to make a valid nomination.
Q. Can a nominee become an owner?
Generally, a nominee does not become the owner of the insurance policy. They are merely custodians of the proceeds, which are eventually distributed to the legal heirs or beneficiaries.
Q. What is the rule for nominees?
The rule for nominees is that the policyholder must officially designate them in the insurance policy documents. This nomination can usually be updated or changed as needed by the policyholder during their lifetime.
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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
Written By:
Vishal Subharwal
Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.
Reviewed By:
HDFC Life
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