What is the prime objective of buying a Life Insurance Policy – To provide ‘financial protection to your dependents, Right’. Then, is it not essential for us to understand who gets our Life Insurance claim, if anything happens to us? Here comes the role of nomination and assignment.
We all know how important life insurance policies are for the general public. A life insurance policy is a contract between the insured and the insurer, where the insurer promises to pay a sum of money in case of death of the insured. This is an effective mechanism to protect ourselves from unforeseen circumstances.
Let us take the example of my friend who was the sole breadwinner of his family. His wife was not educated enough to hold on to a full time job. He has two children in school. When he was asking for some investment advice, the first thing I asked him is if he had any insurance policies. He did not understand the concept of insurance. I had to explain to him how insurance policies work, what a premium was, and the concepts of nomination and assignment.
He had the most difficulty understanding the concepts of nomination and assignment in life insurance. The following are some of the questions he asked, and the clarifications I gave him.
Who is a beneficial nominee? What do you mean by nomination and assignment in life insurance? What is the difference?Are they the same concepts?
Any life insurance holder who has crossed 18 years of age can now nominate people to receive the benefits of his insurance policy in case he expires before its maturity. A beneficial nominee or a ‘nominee’ is compulsory for a life insurance policy.
Also Read- Why you should avoid endowment policy
Nomination and Assignment – Meaning
A nomination is the act of giving a right to person or persons to receive the benefit of an insurance policy, in case the original holder expires.
In the example of my friend, his wife would be the nominee. In case he dies, his wife would be eligible to receive the benefits of the insurance policy. His wife is the ‘beneficial nominee’ and the act of giving her the right is called nomination.
Assignment is a whole different ball game. It is the act of transferring the rights of an insurance policy to a third party as collateral. In case my friend takes a loan based on his insurance policy, he can use the insurance policy as collateral. He will ‘assign’ the insurance policy to the bank. That is, in case he defects in paying the loan. The bank can enforce the insurance policy and collect the claims on his behalf. This is a typical case of assignment.
Difference between Nomination and Assignment in Life Insurance
What is the difference between a nominee and nomination?
A nomination is the act of giving a right to a person to receive the claims of an insurance policy.
The person who has been nominated is called a nominee.
What is the objective of nomination in a life insurance policy?
We need to first understand why a life insurance is required. In my friend’s example, it is required to protect his family from a sudden loss caused due to his death. Since he is the only breadwinner of the family, his death would disadvantage his family a great deal. They would need money for their children’s educations, and daily subsistence.
This life insurance claim would help them with exact this.
But we have a problem. The insurer in this case is the life insurance company. The insured in this case would be my friend. The contract is only between the insurer and the insured. In case the insured passes away, the insurer will pay money to the insured. But he is dead. So how does the payment go through?
This is where a nominee comes in. In case of death of an insured, the nominee has full rights to receive claims on behalf of the insured and enjoy the fruits of the same.
This is why a nomination is important
What do we mean by beneficial nomination? Are they the same as a simple nominee?
We need to first understand the meaning behind a nominee. Initially, a nominee was somebody nominated by the insured, to receive the claim. After the nominee receives the claim, they will hold it as a trustee and transfer the claim to ultimate legal heir.
In my friends example, imagine my friend nominated his brother as a nominee. Initially before the concept of beneficial nominee came into place, the brother will receive the claims on behalf of my friend and then transfer it to his legal heir ie his children.
But after the introduction of the beneficial nominee into the Insurance Act, the brother will have all rights over the claim amount received. He has no liability to transfer it to his legal heirs.
Thus, the concept of beneficial nominee reduced legal disputes after the death of the insured.
Is nomination backed by any section in the Insurance Act?
Yes, this is backed by Section 39 in the Insurance Act. This makes nomination compulsory. The name of the nominee can be changed as many times as required. In case the nominee is a minor, there can be another person nominated to hold the claims as a trustee till the minor becomes 18 years of age. For example, in my friend’s case, he can even nominate his son who is 11 years as a nominee. But till his son becomes 18, the amount will be held by a third party as a trustee.
What are the rights of a nominee in Insurance?
A nominee gets rights over the insurance policy only in the case of death of the insured. If the insured does not die before the maturity of the policy, the nomination will stand cancelled. Suppose my friend took an insurance policy till the age of 75. The nomination and the policy will stand cancelled when he survives over the age of 75.
Is assignment allowed under Insurance Act? What is assignment? What is absolute assignment and conditional assignment?
Yes, assignment is allowed under the Insurance Act.
Assignment is the act of transferring the rights of an insurance policy to a third party as collateral. If my friend wants to buy a car and has an insurance policy worth 10 lakhs. He can pledge this policy for getting the loan at favourable interest rates. This is assignment.
Absolute assignment is when the entire policy, including its rights and ownership to the bank.
A conditional assignment happens only if certain rules or regulations mentioned in the contract are violated,
For example,If the contract says there will be assignment if my friend misses any EMI payment, then this would be called a conditional assignment.
What are the LIC Policy Nominee Rules and Procedures?
Under the new LIC policy nominee rules, all nominees are beneficial nominees. As we discussed, earlier, nominees used to only hold the claims on behalf of the ultimate legal heirs. But the rules have now changed where nominees can enjoy the benefits of insurance claims that they have received. The new LIC procedures for nomination are as follows,
- You can use Form 3750 to change the nominee.
- It should be accompanied by a proof of relation for the person being nominated.
- Endorsement of policy bond
- No prior notice to the existing nominee is required.
What do you mean by the spouse and law of nomination?
Spouse and law of nomination came from a very famous case law where the nominee was not the spouse of the insured. The nominee chose to retain the cash claims received by quoting the beneficial nominee rule. This was thrown out by the higher courts. They brought out a law called the spouse and law of nomination. The law mandates that the spouse should be mentioned as a nominee in all possible documents.
Even if any other third party is mentioned as a nominee, the spouse and law of nomination will ensure that the ultimate money is received by the legal heirs of the nominee. The spouse and law of nomination also encourages people to make a registered will. Will to avoid confusion in the transfer of properties after the death of a person.
Thus, an insurance policy covers the interests of the insured in many ways. The discussion with my friend helped him understand the values of nomination and assignment.
Do you understand the difference between nomination and assignment now?Also,What is your view on nomination and assignment?