Who is a beneficial nominee for an insurance policy?

May be all of us know the meaning of a nominee of the life insurance policy. Nominees of insurance policies are merely designated trustees acting as receivers of insurance proceeds on behalf of the policyholder’s legal heirs. In the other words, while the insurance company has to hand over the death benefit to the nominee, other legal heirs can stake their claim to the amount. But, sometimes there can be multiple claims made, which can result in problems for the stake holders involved. The above situation left some scope for disputes.

The Insurance (Amendment) Act 2015 addressed such chances of disputes among the family member over the death benefits of policyholders. The act has created a new category of nominee called “beneficial nominee”.  The beneficial nominees are essentially beneficiaries-cum-nominees for the policy. These beneficial nominees should be the close relatives of the policyholder such as parents, spouse, and children.  As per the amended Insurance Act, once any of the close relatives is nominated in the policy, as a beneficial nominee, he/she will be the undisputed final-recipients of the claim and enjoy the amount even if other legal heirs attempt to stake their claims. No further judicial proceedings are required to prove his/her right to receive the money. The new clause also makes it simpler for policyholders to specify multiple nominees (close relatives) and their share in the proceeds. In case the nominee is a minor, the policyholder is required to appoint a guardian to receive the money on behalf of the minor and hold it to the benefit of the minor nominee.

The new measure under the insurance (amendment) act is applicable even for policies issued before the Act came into effect.  A policyholder can now choose between appointing a regular ‘nominee’ or a beneficial nominee. While the earlier category of regular ‘nominee’ still exists, once the policyholder specifies a beneficial nominee, a regular nominee becomes redundant. The policyholder can change the nominee any number of times. For that he/she has to submit a Nomination Change Form to the Insurance Company duly signed mentioning the Nominee’s name, Address, Date of birth, Relationship with the policyholder, etc.

Remember, the nomination is mandatory in life insurance. In the past, there are incidents that Non-family members like friends and distant relatives as nominees of policyholders. Although one can nominate distant relatives or even friends, the fact is that it will be very difficult to prove ‘insurable interest’. This along with the fact that there is a moral hazard in appointing such a nominee, the insurance company might refuse the nomination or might ask for further explanations.