Nomination: Designating the Recipient

Nomination: Designating the Recipient

What it is: Nomination is the process where the policyholder (the person who bought the insurance) formally names one or more individuals who will be entitled to receive the policy benefits (the death claim amount and any other applicable payouts) if the insured person passes away during the policy term.¹ Think of the nominee as the designated receiver of the insurance money.

Key Characteristics:

• Right to Receive, Not Ownership (Usually): Generally, the nominee is primarily entitled to receive the policy proceeds. However, being a nominee doesn’t automatically grant them legal ownership of the money, especially if they aren’t immediate family. They often act as a trustee, responsible for distributing the funds according to the laws of succession applicable to the deceased.
• Beneficial Nominee (Spouse, Children, Parents): A significant development in Indian insurance law is the concept of a “beneficial nominee.” If the nominee is the policyholder’s spouse, children, or parents, they are considered the rightful beneficiaries and have a stronger claim to the policy benefits, superseding other legal heirs. This aims to provide quicker and more secure financial support to the immediate family.
• Multiple Nominees and Percentage Allocation: You can nominate more than one person and specify the percentage share each nominee will receive.
• Minor Nominee and Appointee: If a nominee is under 18 years old (a minor), you must appoint an “appointee” (also known as a guardian) who will receive the funds on behalf of the minor until they reach adulthood.
• Changeable: The policyholder has the right to change the nominee(s) at any point during the policy term before maturity. The latest nomination on record will be considered valid.

Why is Nomination Important?

• Streamlined Claim Process: Nomination simplifies the claim settlement process for the insurer.² They can directly pay the nominated person(s) without getting involved in lengthy legal proceedings to determine the legal heirs.
• Financial Security for Loved Ones: It ensures that the intended individuals receive the financial benefits of the insurance policy promptly after the policyholder’s demise.

Example:

Mr. Sharma buys a life insurance policy and nominates his wife, Mrs. Sharma (60% share), and his son, Rohan (40% share). If Mr. Sharma passes away during the policy term, the insurance company will pay 60% of the death benefit to Mrs. Sharma and 40% to Rohan. Since they are the spouse and child, they are beneficial nominees.

Assignment: Transferring Ownership

What it is: Assignment is the act of transferring the rights, title, and interest in a life insurance policy from the original policyholder (the assignor) to another person or entity (the assignee). Essentially, the ownership of the policy is being handed over.

Key Characteristics:

• Transfer of Ownership: Unlike nomination, assignment involves a complete or conditional transfer of ownership rights. The assignee gains control over the policy.
• Irrevocable (Usually): Once a policy is assigned, the original policyholder generally loses all rights to it and cannot unilaterally change it back without the assignee’s consent.
• Specific Purposes: Assignment is typically done for specific reasons, such as:
  • Securing a Loan: The policy can be assigned to a lender (like a bank) as collateral for a loan. If the borrower dies before repaying the loan, the lender can claim the outstanding amount from the policy proceeds. Once the loan is repaid, the policy is usually reassigned back to the original owner.
  • Gifting: A policyholder might want to gift their policy to someone else.
  • Business Purposes: Policies can be assigned in business contexts, for example, for key person insurance or as part of financial agreements.
• Formal Process: Assignment requires a formal written agreement (assignment deed), often signed by both the assignor and the assignee, and usually needs to be witnessed. The insurance company must be officially notified of the assignment and will record it.
• Types of Assignment:
  • Absolute Assignment: All rights are permanently transferred to the assignee.
  • Conditional Assignment: The transfer is subject to certain conditions being met (e.g., repayment of a loan).
  • Collateral Assignment: A type of conditional assignment where the policy is used as security for a debt.

Impact on Nomination:

Generally, a valid assignment automatically cancels any existing nomination because the ownership of the policy has changed. If the policy is reassigned back to the original policyholder later, a new nomination would need to be made if desired.

Example:

Mr. Verma takes out a life insurance policy and later needs a loan from a bank. As a condition for the loan, the bank asks him to assign the life insurance policy to them. Mr. Verma executes an assignment deed in favor of the bank. Now, the bank becomes the assignee and has rights over the policy to the extent of the outstanding loan amount. Any existing nomination Mr. Verma had made earlier would be cancelled. Once Mr. Verma repays the loan fully, the bank will reassign the policy back to him, and he will regain full ownership and the right to make a new nomination.

Key Differences Summarized:

Feature	Nomination	Assignment
Purpose	To designate the recipient of the death benefit.	To transfer ownership and rights of the policy.
Ownership	Policyholder retains ownership. Nominee doesn’t gain ownership (usually).	Ownership is transferred from the assignor to the assignee.
Rights Conferred	Right to receive the claim amount upon the insured’s death.	All rights and control over the policy are transferred to the assignee.
Legal Standing	Simplifies claim settlement; doesn’t always confer absolute ownership.	Legal transfer of rights and ownership.
Revocability	Can be changed by the policyholder at any time before maturity.	Generally irrevocable without the assignee’s consent.
Formalities	Usually a simpler process, often done through a form provided by the insurer.	Requires a formal written assignment deed and notification to the insurer.
Impact on Policy	Doesn’t change the underlying terms and conditions of the policy.	Transfers control and ownership of the policy.
Impact on Existing Nomination	Generally remains valid unless the policy is assigned.	Usually cancels any existing nomination.

Understanding these distinctions is crucial for policyholders to manage their insurance policies effectively and ensure that the benefits are distributed according to their wishes and that their financial obligations are met. Always clarify any doubts with your insurance provider or a financial advisor.