Published in Mint on Apr 26 2015
As a financial product, a life insurance policy is the most meaningful for your dependants as it promises to protect them financially in the event of your death. Therefore, when you buy a life insurance policy, it is important to mention a nominee who will be entitled to the insurance money in the event of the policyholder’s death during the policy term. However, till now, nominating someone didn’t necessarily mean that the nominee would be the ultimate beneficiary of the insurance money. “Previously, by law, the nominee in a life insurance was meant to receive the death benefit from the insurance company and distribute to the insured’s legal heirs. This created confusion because policyholders thought that the nominees they specified would be the eventual beneficiaries if they died,” said Kapil Mehta, executive director, SecureNow Insurance Brokers Pvt. Ltd.
But the new rules effected by the Insurance Laws (Amendment) Act, 2015, clearly make nominees, immediate family members such as spouse, parents and children, the beneficiary so that the insurance money can go to the intended recipient. In fact, the new rules have another nominee-friendly feature that you must know in detail, but first let’s start with understanding what a beneficial nominee means.
Immediate family is beneficial nominee
The amended Act has introduced the concept of a beneficial nominee. The nominee in this case is the person who ultimately benefits or owns the insurance money. According to the new rules, when a policyholder nominates parents, spouse or children, then the nominee or nominees will be beneficially entitled to the amount payable by the insurer. “In the new insurance law, if an immediate family member such as spouse is made the nominee, then the death benefit will be paid to that person and other legal heirs will not have a claim on the money. This is good because it makes the nomination process more meaningful and clear. A policyholder knows that the immediate family member nominated by him will get the benefit. This will be applicable for all insurances that have a maturity date after March 2015,” said Mehta.
That’s not all. The new rules give rights to the nominee to collect the insurance money even on maturity of the policy in the event of the policyholder’s death. “Before the amendment Act, a nominee had the right to collect the policy money only upon death of the life assured during the term of the policy, but not if a policyholder survived till maturity, but died before getting the maturity corpus. The nominee is entitled to receive the maturity benefits, and in case he happens to be the beneficial nominee, then other legal heirs can’t claim the maturity proceeds,” said C.L. Baradhwaj, senior vice-president, compliance, and chief risk officer, Bharti AXA Life Insurance Co. Ltd.
Rules of assignment
The other change relates to the assignment of an insurance policy. You may know that at the time of taking a loan from a bank, you can pledge your insurance policy as collateral security. The formal process to do this is called assignment. “Assignment is the process by which you transfer your rights to another person or entity. Assigning one’s life insurance policy to a bank is fairly common. In this case, the bank becomes the policy owner whereas the original policyholder continues to be the life assured on whose death the bank or the policy owner is entitled to receive the insurance money. This earlier meant that the original nominee would automatically stand cancelled upon assignment. It was then up to the bank or the creditor to pay the balance money to the nominee,” said Baradhwaj.
Now, when an assignment is done for the purpose of a loan, the original nominee remains. “The insurer will pay the bank the outstanding dues and pay the balance to the nominee directly. This makes the whole process easier for the nominee,” added Baradhwaj.
In fact, you don’t even have to assign the policy fully as the new rules allow for partial assignment. So, say, a person has a life insurance policy of Rs.50 lakh and she decides to assign the policy to the bank to the tune of Rs.20 lakh because that’s the amount of loan she took from the bank. In case of her death, the insurer would pay the bank the outstanding dues up to Rs.20 lakh and the balance to the nominee.
Although the concept sounds similar, assignment is not the same as taking a term plan purely for the purpose of covering a loan. In insurance parlance, these term plans are known as credit life policies. In this case, you buy insurance under a group policy in which the bank is automatically the policyholder and you the life assured. Usually, the insurance cover or the sum assured in this case decreases as the outstanding loan amount decreases. On death of the policyholder, the insurer pays the bank the outstanding dues and the remaining goes to the nominee. For the purpose of assignment, you can assign any of your insurance policies as long as the sum assured is equal to or greater than the loan amount.
Assignment is not restricted to taking a loan. “Earlier, you could assign a policy for any purpose. But now the rules give insurers the power to reject assignment if it leads to trading of insurance or goes against the interest of the policyholder or the public. The industry is yet to frame the rules on this,” said Baradhwaj. Do note that if you assign the policy for other purpose other than taking a loan, the nomination stands cancelled. The new rules are directed towards not only protecting the policyholder’s interest, but also nominee’s.