The Beneficiaries in an Insurance Claim: Nominees and Appointees

The term “beneficiary” is defined as “a person who derives advantage from something, especially a trust, will, or life insurance policy”. In India rarely is the word beneficiary used.

In the case of a general insurance or a health insurance policy the person who can claim is usually the policy owner himself, because he is alive and capable of claiming.

In a life insurance policy, the policy holder is usually dead before claim occurs. (LIC of India uses the word “claim” for maturity proceeds and interim survival proceeds: in standard terminology these are not “claims” but contractual payouts). Here is a list of payees who can potentially receive amounts from claims on a life insurance policy.

1.  Nominee
2.  Appointee
3.  Assignee
4.   Trustee
5.   Joint Life Policy Holder
6.  Policy Owner
7.  Court Appointed Receiver
8.   Government Authorities

Nominee: This entity is almost unique to India and has an entire clause in the Insurance Act (S.39) governing his status. The name of the nominee is usually indicated at the start of the policy and normally is the close relative of the policyholder. Thus a spouse, children, brothers, sisters, and parents are the usual nominees. By convention, Insurance companies frown upon strangers being made nominees. It is almost impossible to nominate a friend. A policyholder can change his nominee any number of times during the currency of the policy at no cost. Only the name of the new nominee and a simple notice is required. Nominees have no role to play till the policy results in a death claim. Nominees do not have the right to retain the money, and their role is limited to giving the insurance company a discharge for the claim payment. Thus the cheque is made out in the name of the nominee although as per law, he may not have any right to use the money! But, since a vast majority of the nominees are also rightful heirs, complications are few. As a corollary, it is open to a non-nominee heir to challenge the nominee to give up the proceeds. It must be observed here that the rights of a nominee are most easily challenged amongst all beneficiaries.

A policy can have more than one nominee, but as will be seen the outcome of a policy with multiple nominees is complicated. Indian Law does not allow specifying shares for nominees (remember they are not entitled to use the money, they can just give a discharge to the insurer). Thus if any cheque is made out, it is made jointly to the nominees. Irrespective of the policy having a valid nomination, at the time of claim any person who is a legal heir can bring an order from a court to stop the claim being paid to the nominee. If such an order is received by the insurer after the payment has been made, no blame can be ascribed to the insurer, since he has acted in good faith and in accordance with S.39 of the Insurance Act. But even if a simple letter is received by the insurer after the death of the policyholder but before any payment is made, disputing the rights of the nominee, the insurer will refuse to pay till clear title is established.

Nominees can be major or minor in age.  Since minors cannot execute a valid contract, at the time of death of the policyholder, if the nominee is a minor, claim cannot be discharged by him. To avoid a sticky situation, the policyholder has to appoint another person called the Appointee.

Appointee: As described above the role of an Appointee is to give discharge to the insurance company on behalf of the minor nominee. He is appointed by the policyholder at the time of nominating the minor nominee. His role is extinguished when the nominee acquires majority. Interestingly, there is no restriction on who can be an Appointee. Anyone who is above the age of 18, and of sound mind can become an Appointee, even if he or she is not related to the nominee or the policyholder. The Appointee’s status is governed by the same S.39 of the Insurance Act.

We strongly advocate that if you are a policyholder you must unfailingly appoint a nominee. Please review your life insurance portfolio and check for missing nominations and nominate right away. There are terrible stories of people forgetting that their mother/father was nominated at the time of purchase of the policy and the wife at the time of claim was made to run from pillar to post proving her right to receive the policy monies. Whether you are nominating, or are a nominee, or are invited to act as an Appointee, it is important to know your rights and your limitations. There will be more on the other “beneficiaries” in a further blog. We at Policylitmus strongly believe that it is important to be fully informed to make the right choices while choosing your insurance needs and that the best policy for you  is just a click away.