Does Nomination Guarantee Asset Inheritance?

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There has been the prevalence of an age long question and confusion regarding insurance policies – Does nomination suffice to guarantee that the nominee will get the assets of the insurance holder in the event of his or her death?

Let us delve into a hypothetical case:

Mr. X who is a Hindu holds an insurance policy. He has named his spouse as the nominee of the policy undertaken by him. Now, he is resting assured knowing that since it is his spouse who is the nominee that she will definitely receive the insured money on the event of his death. Now the real question is – how correct is he?

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The fact is that the nominee (as chosen by the policy holder) will receive the money but not own it. It will ultimately be owned by the insurer’s legal heir. The nominee is to hold the asset or the property until the matter of inheritance of the same can be settled, following the death of the insurer. Clearly, this has created a lot of confusion on the part of the nominee(s) and the family of the deceased individual. Even when insurance policies are assigned, i.e. say, it is pledged to a bank when taking a loan and it is then the bank who is the new policy holder. In event of death of the original policy holder, the bank receives the outstanding dues while the remaining amount from the insurance money goes to the nominee to hold. So here too, the nominees simply hold the asset or the money ‘in trust’ until a legal heir comes along the way and in no circumstance can use it or call it their own. Thus, the nominee has no claim on the asset, but the legal heir does.

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It was in the year 2015 that the Bombay High Court settled this dispute between the legal heir and the nominee in case of policy assets. This change in insurance law said that the nominee will be the rightful heir of the insured asset if the nominee of the policy is among the parents, the spouse or the children of the policy holder. Here comes the concept of “beneficial nominee”, whereby the nominee is not just a holder or the caretaker of the insurance money. He or she is the ultimate beneficiary of the money payable by policy holder. Also, no other legal heir would have any claim over this asset once a nominee has been named by the insurer.

However, if there is a will and it can be proved valid, then this document has the capacity to supersede any nominations previously made by the insurer while undertaking the policy. So a will can change the mode of inheritance of assets and properties of an insurance policy.

It is thus always advised that one should indulge in long term decision making and this would ensure that there is no confusion at times of need. The nominations should be made in such a way that there is no obvious dispute between the legal heir and the nominee.

Shailesh Kumar

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