What is Nominee in Insurance: Meaning and Types of Nomination

With the rising financial awareness and the urge to keep a safety net for loved ones, there has been a drastic growth in the purchases of life insurance and term life insurance policies. This wave of proactive financial planning is soaring higher, but the conscious approach should not just be restricted to buying a policy, but further extend to ensure the policy benefits are received without any delay or disputes to the designated recipients in their time of need. So, when an individual buys an insurance policy, adding nominee details is one of the most critical steps.

Introduction to Nominee in Insurance

Generally, a nominee refers to a person who gets rights over the property or holdings of the deceased person until he/she transfers the property or holdings to the legal heirs. The selection of a nominee is a critical aspect of financial management for an individual with term insurance and/or life insurance policies. A nominee in insurance refers to the direct beneficiary who will receive a designated cover after the death of the policyholder. A policyholder can appoint more than one nominee along with their allocated share of the claim benefits according to his /her wish. Usually, the nominee could be a close family member such as husband/wife, children, or parents.

Who can be a Nominee in Insurance?

The insured can select a nominee based on his/her choice who will be the beneficiary of the sum assured (policy cover) in the event of his/her untimely demise. For life insurance or term insurance policies, the policyholder should appoint a nominee before the maturity of the policy, and the appointed nominee can be updated further according to the policyholder’s wishes. The most preferred choice for a nominee in insurance is typically the children, spouses, or parents but, in some cases, can also be a distant relative or friend. The policyholder must ensure that the nominee is 18 years or older and has a sound mind, or would require a custodian to be the recipient of the death benefit acting in place of the minor. Apart from the aforementioned two factors, the policyholder can appoint a desired nominee meeting the following criteria:

• Legal heir: This includes your spouse and children, who can directly claim the policy benefits after the policyholder’s death.
• Immediate family members: The policyholder can appoint immediate family members as nominees which can be his/her parents or siblings or other close family members.
• Extended family members or friends: The policyholder could also appoint any of his/her cousins, extended relatives, or a close friend as the nominee. But, the policyholder should have prior approval from the insurance company to appoint any of the extended family members or friends.

Types of Nomination in Insurance

Typically, the insurance sector has 4 different types of nominations – general, specific, successive, and contingent. For term insurance policyholders, there are 3 types of nominees categorized as – beneficial, minor, and changing. The most preferred nominee choices are spouse and children or any close family member, but for a term insurance policyholder, non-family members can also be appointed as designated nominees. Let’s understand the different types of nomination in insurance and their significance here.

General and specific nomination

The general nominee in insurance is an individual designated but there is no further information about the allocated share in the claim benefits. Whereas, a specific nominee will have a definite share allocation in the policy cover.

Successive and Contingent nomination

Successive nomination refers to when an appointed nominee by the policyholder elects another nominee. Although, there are no specific rules about the count of consecutive nominations, but, each successive nominee must meet the eligibility criteria given by the insurance company and the policyholder. Alternatively, when the primary appointed nominee is unable to receive the benefits, the designated beneficiaries of the assured sum are called contingent nominees.

Minor Nomination

When the nominee of the policyholder is a legal heir with an age below 18 years, he/she is called a minor nominee. In such cases, a custodian should be appointed as a recipient of the assured sum (policy benefits) and be the acting nominee in place of the nominee. When the policyholder passes away due to untimely demise during the policy duration, and the nominee is still a minor, the claim benefits will be managed by the appointed custodian.

Revocable Nomination

When the policyholder wants to have full control of the policy benefits, he/she follows revocable nomination. This implies the policyholder has the complete authority to make any changes to the policy, specifically the amount of premium and the cover adjustments. The policyholder gets all the living benefits whereas the nominee in insurance will receive only the death benefits. According to Section 133 of the Insurance Act, the policyholder can get a revocable nomination and continue to retain full ownership over the policy.

Irrevocable Nomination

An irrevocable nomination implies the policyholder does not have complete ownership of the policy benefits and some rights will be transferred to the nominee. The appointed nominee in insurance policy will have both the living and death benefits and the policyholder cannot change the policy details without the consent of the designated nominee.

Importance of Choosing the Right Nominee

When selecting a nominee for a life insurance policy, it should go beyond procedural formalities as the nominee would be solely responsible for managing the financial resources and ensuring the correct utility without any delay or disputes. The requirement to appoint a nominee restricts the required authority to only a chosen person to receive the benefits in your absence. Before 2015, there was significant confusion citing a lack of clarity in regulations where both nominees and legal heirs claimed the death benefits. Nevertheless, the nominee has the upper hand even if he/she is not a legal heir and gets the benefits even without initiating legal proceedings. This process protects the objectivity of the policy even after the death of the insured.

Conclusion

The selection of a nominee in insurance is one of the most important aspects of efficient financial management. The preliminary eligibility for a nominee is to be 18 years of age or older and have a sound mind. The appointed nominee should either be a legal heir (spouse or children), immediate family members (parents or sibling), or extended family members and friends (which requires prior approval from insurance company. The appointed nominee has the upper hand over managing the policy benefits even if he/she is not a legal heir.