I wonder how many of us are aware of this legal twist.
Will your Nominee get the money on your death?
Did you think that your nominee is the person, who will get all the money legally from your Life Insurance Policy and Mutual funds investments?
Ha! That is exactly what you think if you are not aware of the legal aspects.
We assume a lot of things which sounds like they are obvious, but are not true from the legal point of view.
Today, we all concentrate on nominations in financial products.
For whom are we earning ?
For whom are we investing ?
Who, do we want to leave all our wealth to, in case something happens to us ?
It might be your children, your spouse, parents, siblings etc., or just a subset of these.
You also might want to exclude some people from your list of beneficiaries!.
So you think you will nominate person X in your Insurance policy, and when you are dead and gone, all the money goes to person X and he/she becomes the sole owner ? You are wrong, dude !
It does not work that way. Let us see how it actually does!
What is a Nominee ?
According to law, a nominee is a trustee, not the owner of the assets.
In other words, he is only a caretaker of your assets.
The nominee will only hold your money/asset as a trustee and will be legally bound to transfer it to the legal heirs.
For most investments, a legal heir is entitled to the deceased’s assets.
For instance, Section 39 of the Insurance Act says the appointed nominee will be paid, though he may not be the legal heir.
The nominee, in turn, is supposed to hold the proceeds in trust and the legal heir can claim the money.
A legal heir will be the one who is mentioned in the will.
However, if a will is not made, then the legal heirs of the assets are decided according to the succession laws, where the structure is predefined on who gets how much.
For example, if a man during his lifetime executes a will… In the will, he mentions his wife and children as legal heirs, then after his death, his wife and children are the legal owners of his assets.
It is essential that one needs to execute a will.
It is the ultimate source of truth and replaces the succession law.
Nominee can also be one of the legal heirs.
Mention the Full Name, Address, age, relationship to yourself of the nominee. Do not write the nomination in favour of wife and children as a class. Give their specific names and particulars existing at that moment.
If the nominee is a minor, appoint a person who is a major as an appointee giving his full name, age, address and relationship to the nominee.
Why is the concept of Nominee ?
So you might be wondering, if the nominee does not become the sole owner, why does such a concept of a nominee exist at all ?
It is pretty simple. When you die, you want to make sure that the Insurance company, Mutual fund or your Shares should at least get out of the companies and go to someone you trust, and who can further help, in process of passing it to your legal heirs.
Otherwise, if a person dies and has not nominated anyone, your legal heirs will have to go through the process of producing all kind of certificates like death certificates, proof of relation etc., not to mention that the whole process is really cumbersome! (For each legal entity! The insurance company, the mutual funds, for the shares, for the real estate..) .
So, to simplify, if a nominee exists, these hassles do not happen, since the company is bound to transfer all your money or assets to the nominee.
The company then goes out of scene & then, it is between nominee and legal heirs.
Example of Nomination
Ajay was 58 years old who died recently in an accident. As his children were settled, he wanted to make sure that his wife is the sole owner of all the monetary assets. This includes his insurance policy and mutual funds. So during his lifetime, he nominated his wife as a nominee in his term insurance policy and mutual funds investments. However, after Ajay’s death things did not turn up the way he wanted. The reason being Ajay did not leave a will. Though his wife was the nominee in all his movable assets, as per the law, his wife, along with children, were the legal heirs and all of them had equal right to Ajay’s assets.
One simple step which could have saved the situation was that Ajay should have made a will which clearly stated that only his wife was entitled to get all the money and not his children.
Nomination in Life Insurance :
A policyholder can appoint multiple nominees and can also specify their shares in the policy proceeds. Nomination in life insurance has one limitation, as insurance policies are bought to secure your financial dependents, your first choice of nominee has to be your family members. In case you want to nominate a non-family member like a friend or third party, you will have to show/PROVE the insurance company that there is some insurable interest for the person. This happens because of a Clause called PRINCIPAL OF INSURABLE INTEREST in insurance. Note that provision of nomination in life insurance is related to Section 39 of the Insurance Act.