One can never overemphasise the need for buying adequate life insurance cover for the financial security of one’s family members in the event of the death of the bread earner, especially when there are court cases between husband and wife. However, there is always a concern about the proceeds of the policy being claimed by the other legal heirs or the creditors of the deceased husband. These concerns can be addressed by understanding the meaning of ‘assignment’ and ‘nomination’.

There is a difference between the legal provisions relating to ‘assignment’ and ‘nomination’, and what specific life insurance companies may insist on as a matter of practice. While some of these practices may be based on demands of convenience or underwriting preference, they may not always be based on sound legal interpretation of the provisions. We restrict ourselves here to what we consider to be the legally correct interpretation.

A life insurance policy purchased by a person to cover his own life can be assigned to one or more persons by the policyholder, or one or more persons may be nominated to receive the proceeds from the insurer in case of the death of the insured. While the assignee is the absolute beneficiary of the assigned proceeds, the nominee is only the person authorised to receive the proceeds on behalf of all the legal heirs, and acts as a trustee on their behalf.

Prior to the 2015 Amendment to The Insurance Act 1938, all nominees had equal status, i.e. of a person authorised to receive the proceeds on behalf of the legal heirs of the insured. The 2015 amendment gave a special status to those nominees who were parents, spouse, or children of the insured. Post this amendment, this category of nominees is the absolute beneficiary and not a trustee holding the proceeds on behalf of the all the legal heirs. If the nominee happens to be any person other than these (mentioned in Sec 39(7) of The Insurance Act 1938), the status of such person continues to be that of a trustee.

It is very often misunderstood that post 2015 amendment, only the parents, spouse and children can be nominees under a life insurance Policy. This amendment changes the status of such nominees from recipient trustees to absolute beneficiaries, but in no way restricts nomination only to these persons. It is also often misunderstood that a person from outside the family cannot be a nominee. It may be the practice of specific insurers not to accept such nomination, but there is no provision in law to restrict nomination only to family members or those with insurable interest in the life of the assured.

A nomination may be changed any number of times by the assured. An assignment, as also a ‘will’, overrides any prior nomination made under the Policy. An assigned Policy cannot be made the subject of a ‘will’. An assignment, if conditional, is cancelled on fulfilment of the condition, and the nomination existing at the time of the assignment is reinstituted. If the assignment is absolute, the Policyholder cannot make any changes in the assignment. The Policy can only be reassigned by the assignee, either to the original Policyholder, or to any other person. The interest of a nominee, beneficial (where the nominees are one or more of the persons mentioned under Sec 39(7) of the The Insurance Act 1938) or otherwise, operates only in case of the death of the assured. Thus, if the Policyholder survives the maturity of the Policy, the proceeds are paid to the Policyholder, and not to the nominee.

Another way in which some people secure the policy funds in favour of the wife and / or children (but not parents), is to buy the Policy under Sec 6 of the Married Women’s Property Act 1874. There is no provision to ‘opt out’ of the MWP provisions after the purchase of this Policy. However, securing the interest of the wife may sometime have consequences which may turn out to be undesirable at the time the Policy proceeds are required to be paid. Marriages may sometimes fall apart, and such unfortunate instances are on the rise. A Policy bought under Sec 6 of the Married Women’s Property Act 1874 will still pay the proceeds, either on maturity of the Policy within the lifetime of the insured, or in the event of his death within the Policy period, to the persons (wife and or children) who were named as beneficiaries at the time of taking the Policy, irrespective of the fact that the couple may be divorced, or in the process of securing a divorce. This situation may not be desirable at all in the eyes of the insured husband. To deal with such situations, it is advisable that separate Policies be bought for the benefit of the wife and children. While the insured may continue paying the premium for the Policy in which the children are the beneficiary, husband may stop paying the premium of the Policy in which the wife was the beneficiary. In case the policy is discontinued, the surrender value will still be paid to the wife named in the policy as beneficiary, whether the marriage subsists or not. Apart from insurance, I had always strongly suggest for litigating husbands to prepare and register their “WILL”.

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