It’s important to understand the idea of a nominee in a life insurance policy if you intend to get life insurance. It is a crucial component of insurance, and every policyholder needs to be aware of it.
In essence, getting life insurance serves to protect your loved ones financially in trying circumstances. A strong financial plan can be made when you correctly interpret the nominee’s meaning.
What Does Nomination in Life Insurance Really Mean?
When a person purchases a life insurance policy, (s)he has an option to select nominee(s) who will get the financial benefits of the policy after the policyholder’s death while the policy is in effect. This process is commonly known as nomination.
The entire nomination process is similar to a bank account holder selecting nominee to receive the funds in the account in the event of his/her death. Only when the policyholder has insured his own life, i.e., when the policyholder and the life insured are the same, is nomination permitted. Nominations are not permitted if they are made by distinct people.
Who Is Nominee?
A nominee is someone chosen by the policyholder who will receive the financial benefits in the event of their death while the policy is in effect. A nominee is often the spouse, children, or parents of the life insured. A policyholder may, however, nominate any dependable person as their choice.
Different Types of Nominees
A nominee is someone to whom the policyholder intends to transfer the accumulated financial advantages upon death. The vast majority of insurers favor naming their kids, spouse, etc.
The following categories of nominees are eligible for benefits:
- Beneficial nominees
The nominee is known as a “Beneficial Nominee” if they are the policyholder’s parent, spouse, or kid (an immediate relative). Only the beneficial nominee is given the death benefit amount.
In the past, there have been instances where a legal heir caused issues since the policy explicitly names another candidate to receive the death benefit. To avoid this, the IRDAI developed the idea of “Beneficial Nominee.”
It indicates that when a policyholder names a close relative as the nominee in life insurance, such as a partner, guardians, or children, they become the policy’s beneficial nominee. The insurance proceeds cannot be claimed by any other legal heirs if a beneficial nominee has been selected in advance for a policy.
- Minor Nominees
Numerous policyholders designate minors as insurance nominees. However, because they are not deemed old enough to handle claim amounts, children under the age of 18 must have a custodian named by the policyholder. When a claim is made when the nominee is under the age of 18, the claim will be paid to the custodian until the candidate turns 18.
In this case, the policyholder must designate a nominee who will be able to accept the claim payment on behalf of the minor nominee under the term insurance policy.
- Non-Family Nominees
This may come off as odd. Why would you want to name a stranger (or someone who is not a member of your family) as the beneficiary of your life insurance policy?
Insurers generally won’t accept strangers (or non-family members) as nominees because of this peculiarity.
Therefore, even though one can suggest distant relatives or even friends, it will be highly challenging to demonstrate an “insurable interest.” Because of this and the moral hazard involved in designating such a nominee, the insurance company may reject the nomination or want more information.
- Changing Nominees
You can alter nominees more than once, and the most recent nominee will take precedence over all earlier nominees. The term insurance plan’s nominee may be changed by the policyholder if they so want. To replace the nominee before the term insurance policy matures, the policyholder must fill out the necessary papers.
- Multiple Nominees
The significance of the candidate need not be specific to one individual. In the case of life insurance, many people may be named nominees. You can also define the percentage of the death benefit that each nominee is entitled to. The insurer is not permitted to proceed and distribute the payout money equally among the candidates under such a provision.
Benefits of Nominee in a Term Insurance Policy
Following are the benefits of appointing a nominee under your term insurance policy:
- A policyholder can Appoint Multiple Nominees: The policyholder is free to name many nominees for the same policy. The policyholder can choose to designate more than one nominee under his or her term insurance policy to avoid any potential disputes regarding the death benefit.
- Fulfills the Need for Coverage: The main goal of buying term insurance is to give your family financial security in the event of your untimely passing during the policy period. Choosing a nominee can eliminate the need for term insurance.
For them to collect the death benefit in the event of your untimely passing, it is crucial to name a nominee under your term insurance policy. The term insurance coverage allows you to name one or more candidates, including members of your family.
- Changes to the Nominee During the Policy Term: At the time of policy issuance, a nominee may be named; however, during the policy term, the nomination may be altered. Throughout the policy term, the policyholder is free to substitute a different nominee.
Mistakes To Avoid During Policy Nomination
Here is the list of the blunders you must avoid while nominating for your life insurance.
- Appointing Just One Nominee: Typically, even though we have several nominees in mind, most of us only list one while filling out the policy form. It can be the case that nobody is aware that they can nominate more than one person. Receiving the claim money may be severely delayed or even denied when the nominee passes away before the policyholder and the facts remain the same.
As the policyholder, you must list multiple nominees in the nomination column, along with a specified proportion or the order in which they shall be paid.
- Minor Nominee: The claim procedure will be stopped and the minor will not eventually receive any financial death benefit if the policyholder fails to designate a custodian for a minor nominee. A policyholder must always designate a custodian if their nominee is a minor to avoid the bother. They must also provide the insurance provider with completely verified information about the custodian.
- Not informing the Nominee: This may seem quite simple, but in many households, the spouses and kids are not involved in the household finances. One of the biggest mistakes a policyholder can do is to not educate the candidate about the nomination and the specifics of the policy.
If your dependents are unaware that you have an insurance policy in place to protect them, it will not be effective. Usually, out of insecurity or simple negligence, the insured is unwilling to inform the nominee.
- Appointing a Nominee Under 18 Without an Appointee: To avoid needing an appointee in such a situation, prefer a major person over a minor. It is advisable to provide true and complete information about the appointee, including his or her name, address, relationship to the candidate, etc., if there are circumstances where it is necessary to list a minor as a nominee. And until the youngster becomes 18, the appointee is in control of them.
- Not Updating Nominee Details: Another significant mistake that the majority of holders of term insurance policies commit is failing to timely update the nominee information. The policyholder is responsible for promptly updating the nominee’s information, including name, address, and other pertinent facts, as needed. If the present nominee passes away during the policy term, an immediate update is also required.
Who Can Be a Nominee in insurance?
A nominee is someone chosen by the policyholder who will receive the financial benefits in the event of their death while the policy is in effect. The nominee is typically designated as the spouse, children, or parents.
In the past, there have been misunderstandings about the true status of nominees as legitimate heirs (other than nominees) who have attempted to claim the funds due to a lack of regulatory clarification. A concept known as a Beneficial Nominee was established in 2015 to address this issue and guarantee that the insurance proceeds reach the genuine and intended receivers.
When To Choose Nominee?
Calculating the necessary coverage for your family is crucial when deciding how to safeguard their financial future. You must comprehend the procedure’s terms and conditions, including the nominee definition. It is advised to proceed with the purchase after learning the nominee’s meaning and its implications.
The moment to decide who and what the nominee benefits are is typically at the beginning of the policy. Once the insurance policy is in force, however, you can also alter the nominee. As was previously stated, it is up to the policyholder to determine what is meant by a nominee in light of their specific financial situation.
With time, your preferences might change, and you might feel the need to choose a different person to receive the benefits. As a result, you have the choice to replace him or her at any time during the policy’s term.
Is Nominee Different from Beneficiary?
It is crucial to understand how a nominee differs from a beneficiary to comprehend the nominee’s intent effectively. The term “nominee” in the context of life insurance refers to a person’s legal claim to the policy’s cash value.
No one else, outside the individual or individuals listed as the beneficial nominee to the life insurance, is eligible to receive the benefits. The aforementioned beneficial nominees are entitled to the sum that the insurer is required to pay under the Insurance Laws (Amendment) Act, 2015.