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Whether a nominee or a legal heir will get the assets of the deceased has always been a subject of litigation. There have been landmark judgements that favoured either party in specific cases. That’s why it’s better for an insured to assign a life insurance policy, rather than appoint a nominee. This will ensure that the sum insured is passed to the person he or she intends to rather than legal heirs getting locked in a battle for the money.
In general, the nominee is deemed to be a trustee or a custodian under the law and must distribute the assets to the legal heirs named in a will, or according to the country's succession laws. This is true for all financial instruments, except shares and debentures. While the new Insurance Laws (Amendment) Act, 2015, makes nominees — restricted to immediate family members such as spouse, parents and children — the beneficiary, legal experts say that this can still be challenged in the court.
When you appoint a nominee in a life insurance policy, the person gets the claim money upon death of the policyholder. But as a nominee, he or she has to hold the money on behalf legal heirs of the insured. If you intend to pass it to a specific person, legal experts say that it is better to assign the policy. One way is to assign the policy through Married Women Protection Act. This ensures that the money goes to the wife of the insured.
The policy is assigned through an endorsement on the policy document, or on a separate stamped deed signed by the policyholder and submitted to the insurer. A witness has to sign in both cases.
Usually, assigning the policy is done to institutions for repayment of loans. For example, if you have taken a home loan from a bank, the lender will insist you buy a policy and assign it to the institution. In case of death, the lender gets the money and can deduct outstanding loan from the proceeds. The rest is passed on to the legal heirs. If the borrower lives through the period, the lender will reassign the policy to him or her.
Once a person assigns the policy; it means the insured no longer owns the insurance value of it but the person needs to continue to pay the premium – the assignor basically lose the rights over the policy. After assigning, the insured cannot change the decision unless the assignee agrees to it. The insured, therefore needs to choose the assignee with care, especially in case of money back policies. If a person assigns the money back policy, he also loses the maturity benefits.
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