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Life insurance contracts are usually long-term contracts. Just like land, house, fixed deposits etc, a life insurance policy is an asset of the policyholder. It pays a lumpsum amount on the happening of pre-defined events.

Nomination and assignment are some key features which help the policyholders to effectively manage the benefits accruing under a life insurance policy

What is The Nomination?

The nomination is a process of appointing a person (usually a close family member) to receive the policy benefits in case the life insured passes away during the tenure of the policy. Nomination ensures a smooth transfer of policy proceeds when the life insured is not around. The nomination is governed by Section 39 of the Insurance Act, 1938.

Key Points To Know Regarding Nomination

  1. The nomination is possible only if the policyholder and the life insured are one and the same person. In case the policyholder and life insured are different, the need for nomination does not arise as in case of death of the life insured during the policy tenure, the policyholder is present to receive the policy benefits. 

    Illustration:

    • Policyholder And Life Insured Are The Same

    Rajesh is the life insured and policyholder (policy owner) under a term life insurance policy. His wife Shoba is the nominee. Rajesh, unfortunately, dies during the policy tenure. The death benefit is paid by the insurance company to his nominee Shoba.

    • Policyholder And Life Insured Are Different

    Lalit is the policyholder and his son Kumar the life insured under an endowment plan. Kumar passes away in an accident during the policy tenure. The death benefit is paid by the insurance company to Lalit who is the policyholder.

  2. The nominee can also be a minor in which case an appointee needs to be appointed to receive the policy benefits on behalf of the nominee should the life insured pass away during the minority of the nominee.
  3. There can be more than one nominee in the policy. This is called multiple nominations.
  4. A successive nomination is also permitted. In this case, the life insured appoints person A to be the first person to receive the policy benefits in case of his death. However, in case, A has also passed away and hence not in a position to receive the benefits, then the insurer will pay nominee B, if A and B both are not around, then Nominee C will be entitled to the benefits and so on. This type of nomination is called successive nomination.
  5. The nominee can be changed any time and any number of times by the policyholder by submitting a ‘change in nominee’ form to the life insurance company. The latest nomination supersedes all previous nominations. 
  6. The nominee can be added to the policy at the time of buying the policy by providing the nominee details such as the name of the nominee, age, relationship with life insured, address, etc in the application form. Alternatively, one can add a nominee later on after policy issuance by submitting a nomination form in the prescribed format to the insurance company.
  7. The nominee’s role is limited to receiving the policy benefits in case of death of the life insured during the policy tenure. In case the life insured survives the policy tenure, the benefits are payable to him and not to the nominee. Thus, the nominee comes into picture only in case of the life insured’s demise.
  8. The nominee cannot ask for any changes/modifications to the policy. The insurance company will not make any alterations to the policy basis the nominee’s request.
  9. Any person can be made as a nominee. However, if the nominee is not a close family member such as the spouse, children or parents the insurance company may ask the life insured to prove insurable interest with adequate documentation. The nominee is not necessarily the inheritor of the policy benefits. Basically, the nominee’s role is to give a valid discharge to the insurance company, accept the policy benefits as a custodian and hand it over to the legal heir(s).
    In many instances, this results in financial disputes between the nominee and the legal heir(s). In lieu of this, the Insurance Laws (Amendment) Act 2015 introduced the concept of the beneficial nominee. As per the amended act, parents, spouse, children, if anyone of them is the nominee in the policy, they will be referred to as Beneficial Nominees. The amended law further states that the beneficial nominees will not be mere trustees or receivers on behalf of legal heirs, but will be the ultimate beneficiaries. 

Also Read:- 18 Life Insurance Terminologies a Policyholder Should Know

What Is The Assignment?

Assignment of a policy means transfer of policy ownership from the policyholder to another person or entity. The person assigning/transferring the policy is called ‘assignor’ and the person/institution to whom it is assigned is called ‘assignee’. The assignment is governed by Section 38 of the Insurance Act, 1938.

There are two types of assignment namely absolute assignment and conditional assignment. 

Absolute Assignment is usually done for valuable consideration, raising a loan or out of love and affection towards family members. The assignor loses all rights over the policy and cannot revoke the assignment. All benefits under the policy are payable to the assignee or his legal heirs if the assignee is not living to receive the benefits.

The assignee can deal with the policy the way he chooses to. He may surrender the policy or further re-assign to another person. The policy can be re-assigned by assignee to the assignor.

Usually, the assignee is expected to pay the premiums. However, if the purpose of the assignment is ‘loan against policy’ then the assignor is responsible to pay premiums. In such cases, most insurance companies send renewal intimation notices both to the assignor and the assignee.

Conditional Assignment is an assignment which happens subject to certain terms and conditions. For eg: Suresh assigns the policy to his sister Sheetal on the condition that if Suresh outlives the policy tenure the maturity proceeds will be payable to him else the proceeds should be payable to Sheetal. 

Key Points To Know Regarding Assignment

  1. Assignment changes only the policy ownership not the risk under the policy i.e the life insured continues to be the original person insured.

    Illustration:

    • Ashok has a policy where he is both the policyholder and the life insured. He assigns the policy to his wife Maya. Post assignment Maya becomes the policyholder, and Ashok continues to be the life insured.
    • Shiva has a policy where he is the policyholder and his son Deepak is the life insured. Shiva assigns the policy to his wife Reshma. Post assignment Reshma becomes the policyholder and Deepak continues to be the life insured.
  2. Assignment leads to cancellation of nomination in the policy except for cases where the assignment is done in favor of the insurance company due to a policy loan.
  3. The assignment is effected by way of an endorsement on the policy contract. The assignor is required to submit the assignment request in the prescribed format to the insurance company along with the policy documents. The reason for the assignment has to be stated. Once the assignment is made, the insurance company sends the policy documents to the assignee.
  4. The policy is assigned to the insurance company in case of policy loans and once the loan is repaid, the insurance company re-assigns the policy to the assignor.
  5. Assignment is applicable on all insurance plans except Pension Plans and Married Women’s Property Act (MWP).

Key Differences Between Nomination and Assignment

Parameters

Nomination

Assignment

Policy ownership

Nomination does not change policy ownership, it continues to be with the policyholder

Assignment involves transferring ownership and rights from policyholder (assignor) to another person/entity (assignee)

Purpose

It aims at ensuring a smooth transfer of policy benefits if the life insured is not around.

It aims at transferring all rights and interest in the policy in favor of the assignee

Consideration

There is no such thing as consideration.

Consideration may or may not exist. In the case of assignment of policy as collateral security, valuable consideration is required.

Rights

The nominee has no rights to make any alterations to the policy or ask for policy surrender, cash withdrawal etc. The nominee’s right is limited to accepting policy benefits if the life insured passes away.

The assignee has the right to deal with the policy in any manner whatsoever.

Favour

Nominee is usually a close relative.

Assignee may be a close relative or an outside party such as a financial institution etc.

Revocation

Nomination can be changed any number of times by the policyholder.

Once the policy is assigned, the assignment cannot be revoked/cancelled by the assignor.

Conclusion

Nomination and Assignment serve different purposes and depending on the objectives we wish to achieve through the policy the suitable option may be exercised. 

Life Insurance Articles:- NPS or Pension Plans – Which One Should You Opt For

Life Insurance Riders - An Add on to Life Insurance

Sindu Ramankutty has 10 years of Life Insurance Operations and Customer Service experience. She has worked with two leading private life insurers. She has a PGDBM (General Management) from Narsee Monjee Institue Of Management Studies (NMIMS) Global Access, Licentiate from Insurance Institute of India (III) and ALMI from LOMA.