In life insurance at the policyholder demise a nominee is the person to whom the insurer will transfer the proceeds. But there are cases when this death proceeds have been blocked into family litigation. When other legal heirs of the family or distant relative lay the claim on the money life insurance companies too get involved.
Many of us believe that by appointing a nominee in life insurance we do not have to write a Will. But when you look at the legalities then-nominee has a completely different role. In the eyes of law nominee is just a custodian of your money but not the final legal recipient. Then there is the succession act states that when there is no Will then the money is equally distributed between the legal heirs.
So if the nominee in your life insurance policy is your wife and you have not written any Will. Then your children have an equal share in the death proceeds. In that case, the wife will have to transfer the share to the children if they lay a claim on it. Sometimes a relative can also file a claim which will then bring the life insurance proceeds into this litigation. Then till the court ruling, the money remains un-utilized.
All this is being changed with the new amendment passed in 2015 for life insurance nominee.
Let’s understand what the change was and how it benefits a family:
Beneficiary Life Insurance
You buy a life insurance to protect your family. Your objective is that in case of your death they should get the life insurance proceeds. With this money they will maintain the standard of living you have given them. That’s where nominee plays an important role. Many of us appoint our family member as the nominee so that the insurer pay the proceeds to them. Then they can immediately utilize the money which they will need to repay liabilities or for their own expenses. But as written earlier the situation can be different then what you have thought of bringing a lot of troubles for your family.
So, IRDA taking note of all these troubles brought Beneficial Nominee under life insurance with Amendment in IRDA Act 2015. A beneficial nominee is one step ahead of a nominee. Unlike nominee, a beneficial nominee is considered to be the final recipient of the money. Taking the above example if the wife is appointed as a beneficial nominee then she becomes the final claimant of the proceeds from life insurance. In this case, no other family member or relative can lay a claim on the money. So if she is the only beneficial nominee then even children cannot claim the share of proceeds from life insurance.
As per this amendment, only family members can be appointed as a beneficial nominee. So post this change if you appoint your spouse, children or parents as the beneficial nominee then no other person will be able to claim the share from the proceeds. You can even divide the share of the life insurance proceeds among different family members and all of them will be beneficial nominees.
Which Policies Are Covered?
The change of beneficial nominee came in 2015 and so all policies issued after 2015 are covered for the beneficial nominee. But even policies issued before 2015 and whose maturity is beyond 2015 will be the beneficiary of this new rule. What this means is that if you are having an insurance policy which was issued before 2015 and appointed any of your family members as nominee then she/he is now a beneficial nominee of your insurance policy.
How This Rule Benefits?
One of the major benefits of this new rule is that it will certainly reduce litigations among family members. Since the layer of the nominee to legal heirs is being removed by this change you can actually sigh a relief. The family members whom you have appointed the nominee will be the final recipient of your life insurance policy proceeds. Wen no other family member can claim this then surely life insurance policy becomes a viable tool for protecting your family financial future. It saves them from long court litigation’s which otherwise would have aroused especially when money involved is of large value.
Who Can Still Claim The Money?
Though beneficial nominees have been given rights over the succession there is still a hanging wall and that is of creditors. What if you win liabilities and on your death, these liabilities are still to be paid. In that case, the beneficial nominee will not have the first right. If liabilities remain unpaid then creditors can attach your asset including this life insurance policy. So they get the first right to lay claim on your money and beneficial nominee does not overrule their rights. Wiser to take care of your liabilities and as we advise your life insurance policy amount should include the repayment.
Overall, the beneficial nominee is a good step. It helps in protecting your family financial requirements when you will be not there. But more important it reduces probabilities of litigation among your family members