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Who should be your Nominee for your Term Insurance?

A term insurance plan takes care of the dependents' financial needs in the event of the policyholder's death. Buying a term plan with an appointed nominee is one of the most crucial financial decisions an individual can take in his lifetime.

Nomination for term insurance is the process by which the policyholder appoints an individual, or a group of people who is/are eligible to receive the policy benefits in the event of a death claim. The insurance company pays out the sum assured amount to the appointed person, who is called the nominee. Generally, nominees will be either the spouse or children of the policyholder.

Why is having a Nominee Important?

The selection of a nominee is an imperative part of the insurance application and must never be overlooked. Having a nominee ensures that the assured amount goes into the right hands after the policyholder's demise. Nominee selection also guarantees a smooth claim settlement process by the insurance provider.

There is also peace of mind knowing that the insured's family is financially protected and is not left helpless in the event of his untimely demise.

Who can be a Nominee?

The policyholder must decide the nominee for the term insurance policy. The insured must mention the nominee's name and details when subscribing to the term insurance policy.

The nominee can be anyone, but in most cases, the policyholder nominates his or her mother, father, spouse, daughter, or any other close relative. But in case of the nominee being a distant relative, necessary documentation such as will showing their status and rights must be submitted.

The policyholder can also have multiple nominees for the same insurance policy. In this case, the policy benefits will be split between the nominees based on a predetermined percentage share after the policyholder's demise. These details must be mentioned in the policy at the time of application.

To avail of the nominee benefits, the individual must be aware of the insurance provider’s policies. If the nominee is below 18 years of age, an appointee is chosen who receives the amount on his behalf.

Given below are various categories of nominees possible for a term insurance policy:

  • Beneficial Nominee

    According to the latest rules, if any of the immediate family members (such as spouse, parents, or children) is made the nominee, he or she will automatically become the beneficial claimant of the policy benefits. Such a nominee is referred to as a Beneficial Nominee.

    The presence of Beneficial Nominee means that the death benefit will be payable only to them irrespective of the presence of any legal heirs or successors.

    Original insurance rules state that nominee will receive policy proceeds only after the death of the policyholder. This rule has been amended to state that for a term insurance plan, the nominee can receive the maturity benefit as well. This scenario arises when the policyholder outlives his policy tenure but, for some unavoidable reason, is unable to collect the maturity benefits. Under these circumstances, the maturity amount will go to the Beneficial Nominee.

  • Minor Nominee

    It is common for policyholders to appoint their child or children as the nominee for their term insurance. This is done with the intent of safeguarding their future.

    But if the child is below 18 years of age, he or she is considered not eligible to handle the huge claim amounts. In these cases, the policyholder must appoint a trusted person as a custodian or an appointee for the minor.

  • Non-Family Member Nominee

    Choosing a non-family member as a nominee for term insurance is an oddity and generally not acceptable by the insurance provider. Even though friends and distant relatives can be nominated, it becomes difficult for the insurance company to prove the insurable interest. Choosing a stranger as a nominee is also a moral hazard in the eyes of the insurance company, as it may lead to legal disputes. Due to these reasons, they reserve the right to refuse the nomination.

Procedure to Select and Appoint a Nominee

Nominee for a term insurance policy can be stated during the policy initiation. It involves a simple step of mentioning the name of the nominee in the policy form. In case the nominee name must be added later, it must be updated in the policy bond with the signature of the policyholder in the presence of a witness. It is advisable to nominate a trusted family member to ensure that your finances are used prudently.

The following details of the nominee must be provided to the insurance company:

  • Name
  • Address
  • Age
  • Relationship of the nominee with the policyholder

The nominee can be changed if the policyholder desires to do so. For this purpose, the policyholder must contact the insurance company to initiate the name change process.

Benefits of the Nomination feature in Term Insurance

By nominating an appointee, the policyholder ensures that the death claim goes to the right individual at the time of death claim. The sum assured, along with any bonuses applicable, will be paid to the nominee. 

The several benefits of nomination feature in a term insurance policy are:

  • Fulfil term insurance purpose

    The ultimate objective of a term insurance policy is to ensure that the policyholder's family does not become financially handicapped in the event of his demise. The nomination facility takes care of this need. With a nominee named, the primary purpose of the term insurance is met, and the insurance contract successfully protects the interest of the policyholder.

  • Any person can be nominated

    The nomination rule of the term insurance policy states that any person can be chosen to be the nominee for the insurance contract. But typically, the policyholder chooses a close family member who can be responsible with money. In case he selects a distant relative, he can even choose a distant relative.

  • Multiple nominees can be chosen

    In a term insurance policy, multiple persons can be chosen as nominees. This is helpful because if the first nominee does not survive, the second one receives the benefit.

  • Policy Proceeds can be shared

    The death benefit from a term insurance policy can be shared amongst nominees if there is more than one nominee for the policy. The allocation of the sum assured amount is determined at the time of policy purchase, and the amount is shared later as per the allocation.

  • Cancellation of nominee possible

    Changes and cancellations of the nominees can be made multiple times if necessary.

  • Simple procedure

    Choosing a nominee for the term insurance policy is a simple procedure. The details must be mentioned in the policy document. The legal formalities are undertaken in the presence of the nominee mentioned in the insurance document.

Rules for Nomination in Term Insurance

There are certain rules for nomination in term insurance to follow. These rules are mentioned below:

  • Who can be nominated?

    A nominee can be anyone appointed by the insured who can receive the policy cover post his death. Generally, close family members such as spouses, kids, siblings, and parents must be chosen as nominees. Before the nominee regulations came into effect, there was confusion as to who could be the nominee for the term policy.

    The new rule that was introduced that mandates that just being a legal heir do not entail an individual to secure nomination rights. The policyholder himself must assign the person at the time to purchase the policy or later.

  • Event of Nominee’s Death

    In case the term insurance nominee dies before the end of the policy term, the nomination is cancelled by the insurance provider. The policyholder then needs to submit a new nomination with a person's name assigned who will be entitled to the policy benefits.

    The nominee will receive the policy benefit only upon the demise of the policyholder. In case the policyholder outlives the policy term, the maturity benefits will be directly paid to him by the insurance provider.

  • Cancellation of Nominee

    The policyholder has the right to cancel the nominee or appoint a new one multiple times during the policy term. The nomination form can be downloaded from the website or picked up from the nearest branch office. The form must be filled out and submitted to the insurance company. They will send an acknowledgement to the policyholder once the nominee is cancelled or changed.

  • Scope for Modification of Nominee

    In case the nominee dies before the policyholder, the insured is required to file a fresh nomination for his term insurance. This can be done by filling up the nomination form. A changed nomination will supersede all previous nominations. The last valid nomination form is needed for making these changes. A change in nomination cancels all previously executed ones. The policyholder must ensure that he receives the acknowledgement of change from the insurance provider.

  • Policies without a nominee

    If the term insurance policy does not have a nominee, the insurance provider pays the claim amount to the son, daughter, or spouse who comes under Class 1 legal heir category. If the policyholder has a will, the proceeds will be disbursed according to the rules stated in the will.

    In some cases, the insurance provider also abides by the succession certificate, which clearly states who the amount must be discharged. If there is more than one legal heir, joint discharge of policy proceeds will be made according to pre-determined rules.

Common mistakes in Policy Nomination

The policyholder is bound to make some errors in nomination at the time of policy purchase that may cause unnecessary confusion if not corrected on time.  Given below are some typical nomination scenarios that need to be addressed immediately:

  • Single Nominee Appointment

    Many policyholders choose to appoint only one person as a nominee even if they have more than one family member. This can cause problems in claim settlement in the unfortunate event of the death of the single nominee. The insurance provider will spend more time identifying the legal heir of the insured, which can be avoided by appointing more than one nominee at the time of policy purchase.

  • Minor Nominee

    Many times, the policyholder misses or postpones the appointment of a custodian for a minor nominee who is less than 18 years. In this situation, if a claim arises, the policy proceeds cannot be paid to the minor nominee. For the minor nominee to receive the financial death benefit on time, custodian details must be furnished along with minor details.

  • Nominee details not up to date

    The nominee details such as name, address, ID proof, etc. must be updated regularly. This becomes even more important in the event of the death of the nominee during the policy term.

  • Nominee unaware of policy details

    The nominee must always be kept abreast of the term insurance policy information.  This helps the nominee to submit and acquire the claim within the stipulated time.

  • Misunderstand Nominee rights

    A nominee might be under the impression that he is the only one claiming the policy benefit in the event of the death of the policyholder. But if the nominee name is different from the name of legal heir mentioned in the succession will, the legal heir will be the ultimate recipient of the death benefit. If the policyholder wishes that only the nominee has absolute rights over the claim, he must update his will to that effect.

Steps to Change a Nominee

There is no limit to the number of times the nominee name can be changed. And the change can be done in a few easy steps as well:

  • The policyholder must duly fill the Change of nomination form provided by the insurance provider online or offline
  • The filled nomination form and a copy of the policy document must be submitted to the insurer for updating the nominee information.  The insurer must be convinced of the relationship between the insured and the new nominee
  • The policyholder must obtain an acknowledgement of change from the insurance company and retain it for records. This avoids any discrepancies in the claim settlement process when it arises

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