What You Should Consider Before Making a Life Insurance Policy Nomination
Finance

What You Should Consider Before Making a Life Insurance Policy Nomination

What You Should Consider Before Making a Life Insurance Policy Nomination

The whole purpose behind a life insurance policy is so that one’s family and loved one’s are financially secure following the death of the breadwinner of the family. Life insurance policies come with the death benefit payout, and as soon as the policyholder and breadwinner of the family dies, the insurer makes the death benefit payout to secure the lives of the family financially for a certain period.

When buying a life insurance policy, the policyholder has to make a nomination as to who will receive the death benefit payout. However, this has resulted in a lot of confusion as to who actually has the right to the death benefit payout, the nominee or the family. Of course, taking into consideration that the nominee is not a family member but could be a friend or a loved one (out of wedlock) of the policyholder. Which brings us to the definition of who is a nominee and who is a beneficial nominee.

Difference between a nominee and a beneficial nominee

As per the Insurance Laws (Amendment) Act 2015, anyone can be a nominee. A friend or even a family member can be nominated in the life insurance policy of the policyholder. However, the nominee is merely a trustee of the death benefit payout and is entrusted by the policyholder to pass on the death benefit payout to the legal heirs of the policyholders – spouse, children and parents. This means, that the nominee has no right to receive the death benefit payout unless he/she is a legal heir.

On the other hand, a beneficial nominee is one who is the legal heir of the policyholder and has the right to receive a portion of the proceeds from the life insurance policy along with other legal heirs.

Now, if the policyholder does not have a legal heir and is not married but has a loved one or a friend who is nominated in the policy, then if the policyholder has written in his/her will that he/she wishes for that particular person to receive the proceeds from the payout, only then will the proceeds from the life insurance policy be passed on to that person, who is not family or legal heir of the policyholder.

When it comes to making nominations, most life insurers today prefer if the nominee is a beneficial nominee (legal heir) and not just anyone. In fact, some insurers refuse policyholders to nominate a person that they do not have any blood relation with, as it could lead to problems when the death benefit payout has to be made. In addition, policyholders can now buy a life insurance policy under Section 6 of the Married Women’s Property Act as this act ensures that the death benefit payout is made specifically to the wife and children of the policyholder. By registering the life insurance policy under this act, no other relative of the policyholder can have a claim in the death benefit payout made by the insurer.

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