Why this distinction matters When the policyholder dies, the insurance company gives the claim amount to the nominee named in the policy. Everyone thinks that the nominee will automatically receive the money. Indian law differentiates between a nominee and a legal heir and it is necessary to know the difference so that the right person can receive the money.
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Role of a nominee in insurance policies A nominee is the one who is nominated by the policyholder to receive the amount of the insurance claim after he is deceased. The nominee is a trustee of the money and is required to keep the money in trust of the lawful heirs. The task of the insurance company is over after giving the money to the nominee. The nominee is not necessarily the owner of the money, except in the case where the nominee is also a lawful heir.
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Rights of legal heirs under Indian law Legal heirs are the ones who are legally eligible to receive the property and the assets of the deceased as per the laws of succession. In case the nominee is not a legal heir, the legal heirs become eligible to receive their share of the insurance amount from the nominee. The nominee cannot deny transferring the amount to the legal heirs. This holds good in the case of the life insurance policies as well as other financial instruments.
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Situations that could give rise to conflicts Disputes primarily arise when the nominee and the legal heirs are two different people. In case a policyholder nominates a close relative or a distant relative but the legal heirs are the spouse and the children, the legal heirs can claim the insurance amount. Similarly, in joint families, there are more than one heir who are eligible for an equal share and therefore disputes in case the nominee tries to claim the entire amount.
How to avoid confusion over payouts Policyholders may avoid conflicts by making the nominee and legal heirs identical or by signing a valid will clearly stating distribution of properties. Legal advice can be taken while planning estates so that insurance money and other properties may be transferred to the intended beneficiaries without prolonged court battles.
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Significance of effective estate planning Although nominees facilitate payment of claim amounts by the insurers, final rights are with legal heirs under the law of succession. To avoid confusion, the policyholders must change nominations from time to time and leave a will indicating the manner in which the money is to be distributed. It is easy for relatives and ensures that the insurance money is utilized as intended without any confusion.
