In life insurance plans, Nomination and Assignment are the two important terms that are frequently used. Acknowledging these terms helps the policyholder to extract the benefits available under the life insurance policy without making a hole in his/her pocket.
Policyholders should know the exact difference between the two before making any decision to purchase the policy. It is required that individuals should read terms and conditions carefully so that one doesn't make any mistake and use the policy in the right way.
The nomination is a right given to the policyholder that authorizes him/her to appoint a person (usually a close family member) to receive the benefits in the event of the death of the life assured. The person who is appointed by the policyholder to receive the benefit is called a Nominee. The nomination is governed under Section 39 of the Insurance Act, 1938.
Under the life insurance policy, the policyholder nominates a person who is entitled to receive the benefits in case something happens to the life assured. Some of the different types of nominees given below:
As per the law, any immediate family member (like spouse, children or parents) nominated by the policyholder is entitled to receive the monetary benefits and will be the beneficial owner of the claim benefits. It is important to note that only immediate family members can be termed as Beneficial Nominees.
Many individuals appoint their children as beneficiaries of their life insurance policies. Minor nominees (who are less than 18 years of age) are not considered eligible to handle claim amounts. For this, the policyholder needs to assign an appointee or custodian. The claim amount is paid to the appointee until the minor turns 18.
These types of nominees can be distant relatives or even friends as the beneficiary of the life insurance policy.
Policyholders can change their nominees as many times as they want, but the latest nominee should supersede all previous ones.
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Assignment of the policy refers to the transfer of rights, title, and policy ownership from the policyholder to another person or entity. The person involved in assigning/transferring the policy is called assignor, and the person/institution to which it is assigned is called the assignee. The assignment is regulated under Section 38 of the Insurance Act, 1938.
The assignment is categorized under two different types, i.e. Absolute Assignment and Conditional Assignment.
Under the absolute assignment, all rights, title and interest are transferred by the assignor to an assignee without reversion to the assignor (in case of any event). It shifts the ownership of the insurance policy to other parties without any terms and conditions. This assignment is usually done for money consideration such as raising a loan, out of love or affection towards family members.
It means that the transfer of rights will happen from the Assignor to the Assignee subject to certain terms and conditions. If the conditions are fulfilled, only then the policy will be transferred.
Let's discuss how assignment differs from nomination.
|Source||It is made through mentioning the names of the nominees.||It is made through an endorsement on the contract policy.|
|Policy Ownership||Policy ownership does not change under nomination, it continues with the policyholder.||It involves transferring rights/ownership from the assignor (policyholder) to the assignee (person/entity).|
|Purpose||It offers the nominee to avail claim benefits in case of death of the life assured.||The life assured will transfer all his/her right/ownership of the policy to another person/institution.|
|Consideration||Nomination does not support consideration.||The assignment might/might not support consideration.|
|Witness||It is not required in the nomination.||Without a witness, the assignment will be considered invalid.|
|Right to sue||The nominee cannot sue the policyholder of the policy.||Assignee has the right to sue the assignor of the policy.|
|Policy Amount||The nominee is entitled to avail the claim benefits in case of death of the life assured||Assignee is entitled to receive the policy money.|
Nomination and Assignment serve different purposes. The nomination protects the interests of the insured as well as an insurer in offering claim benefits under the life insurance policy. On the other hand, assignment protects the interests of an assignee in availing the monetary benefits under the policy. The policyholder should be aware of both of them before buying life insurance.