Wait for new guidelines to assess traditional policies

New products complying with these guidelines will be introduced over the next few months
Published in Mint on August 7th, 2013

In the case of a life insurance policy, if the policyholder and the nominee die at the same time, who would get the claims proceeds?
—John Wilson

The short answer is the legal heirs of the policyholder as determined by a will or statutory law if the policyholder dies without a will.

The longer answer provides fascinating context. In 1983, in the Sarabati Devi versus Usha Devi case, the Supreme Court ruled that the laws of succession supersede a nomination made under the Insurance Act of 1938. The ruling said “that a mere nomination made under section 39 of the [Insurance] Act does not have the effect of conferring on the nominee any beneficial interest in the amount payable under the life insurance policy on the death of the assured. The nomination only indicates the hand which is authorised to receive the insurance amount, on the payment of which the insurer gets a valid discharge of its liability under the policy. The amount, however, can be claimed by the heirs of the assured in accordance with the law of succession governing them”. The exception to this are policies issued under the Married Women’s Property Act, 1874.

This ruling has been upheld in several instances after 1983 and essentially clarifies that, on death, insurance benefits pass on to legal heirs via the nominee. The implication for a policyholder is that if he wants to direct insurance benefits in a specific manner, she should write out a legal will with instructions. A nomination in the policy may be insufficient.

I want to purchase a life insurance policy. Should I go for an endowment, money-back or a term policy?
—Tarun Kapoor

Term insurance is always best and the first insurance to buy. It provides a large benefit to the family if you die but no return if you live through the term. The term cover should be about 10 times your annual income.
The new unit-linked insurance plans can fit into your portfolio from an investment perspective, provided you have a horizon of at least 10 years.

I do not recommend any traditional endowment or money- back plans that are available today. These plans deliver low returns and generally have very high surrender penalties in case you want to stop the insurance. The insurance regulator announced new traditional product guidelines earlier this year. New products complying with these guidelines will be introduced over the next few months. Those may be better because the regulator has specified a threshold value for surrender charges. However, I will have a clearer perspective once the new products are actually introduced. Write back after two months.

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