Why friends or well-wishers cannot be beneficial nominees under a life insurance policy

What is insurable interest?

A core principle in insurance, it represents the financial stake that you have in insuring something that you own. For example, any damage to your car will result in a monetary loss to you, making it a valid case of insurable interest. It is a pre-requisite for issuing any insurance policy.

In the case of life insurance, a policyholder has to demonstrate insurable interest while naming dependents in the policy. Life covers can be issued only if the beneficiaries are likely to face financial crises in the case of life assured’s death.

Also read: New IRDAI rules: Life insurance policyholders to get higher early-exit payouts from October 1

The concept of beneficial nominees

As per the Insurance Act amended in 2015, parents, spouse and children qualify as beneficial nominees. Insurers, typically, do not issue life policies where someone other than such close family members are named as beneficiaries, though certain exemptions do exist. For example, guardians and employers can buy policies to protect the interests of their wards and key employees, respectively. Insurance companies also offer dedicated life insurance policies that guardians can buy for their dependents with disabilities.

While others can be nominees — their role is limited to giving the life insurance company a valid discharge — that is, once the insurer hands over the death claim proceeds to the nominee named in the policy documents, the company’s responsibility ceases. Legal heirs can claim their share in the proceeds from the nominee.

However, when you name beneficial nominees — specifically, parents, spouse or children as per the definition in the Insurance Act — in your policy, no other legal heir can come forward to dispute the death claim payout. You can also name multiple beneficial nominees and specify their share in the claim amount too.

Also read: Term insurance: A delay in buying can cost you dearly

Creditors retain the first right over proceeds

While the concept of beneficial nominees prevents other relatives from staking a claim to the death benefits paid out, this does not apply to creditors. If the deceased policyholder was in debt, the proceeds can be used to pay off such loans.

That is, unless the policyholder is married has taken the policy under the Married Women’s Property Act (MWPA). In such cases, the proceeds will be paid out to the wife and the children. Buying the policy under the MWPA leads to the creation of a trust to which the claim proceeds are transferred. It is primarily aimed at married men who would want to ensure that only their wives and children receive the claim proceeds from their life insurance policies. You will have to specify if the policy is being taken solely for the benefit of your wife and children.