In insurance law, a nominee is the person or entity chosen by a policyholder to receive the policy’s proceeds upon the insured’s death. Unlike in banking law, insurance nominations carry specific distinctions regarding ownership and distribution.
Nominee v. Legal Heir
Historically, a nominee was viewed merely as a trustee or “collector.” Their role was to receive the funds from the insurer and distribute them to the rightful legal heirs (such as a spouse, children, or parents) according to succession laws.
The Rise of the “Beneficial Nominee”
The Insurance Laws (Amendment) Act, 2015, introduced the concept of the Beneficial Nominee. Under this provision, if a nominee is an immediate family member—specifically a spouse, child, or parent—they are considered the absolute owner of the proceeds. This status allows them to keep the funds, overriding the claims of other legal heirs.
Categories of Nominees
| Nominee Type | Description |
|---|---|
| Beneficial Nominee | Immediate family (spouse, parents, or children) who have the right to both receive and own the proceeds. |
| Minor Nominee | Children under 18. A guardian (appointee) must be named to manage the funds until the child reaches adulthood. |
| Contingent Nominee | A backup nominee who receives the benefit only if the primary nominee passes away before the policyholder. |
| Non-family Nominee | Friends or distant relatives. They typically act as custodians and may face legal challenges from rightful heirs. |
Legal Provisions and Procedures
The nomination process is primarily governed by Section 39 of the Insurance Act, 1938.
A policyholder can change or cancel a nominee at any time before the policy matures via a policy endorsement.
One may nominate several individuals and specify the exact percentage share for each.
If a policy is “assigned” (ownership is transferred) to a third party, such as a bank for a loan, the nomination is automatically cancelled, unless the assignment is specifically made as security.
Exclusions:
It is important to note that Section 39 of the Insurance Act does not apply to policies governed by Section 6 of the Married Women’s Property Act, 1874.
