Importance of Nomination in Various financial products
Last week, there was a call from an advocate friend regarding one insurance claim. His client’s father expired in an accident and later they found out that the nomination in his policy was favouring his second wife and that lady was planning to claim the huge insurance amount without giving anything to the first wife and her children.
Such cases are common in insurance. Commonsense says that the nominee can enjoy the entire claim amount! But it is not the reality. Nominee has a different role to play in this case. Let us discuss the effect of nomination in some common financial instruments.
Nomination – Life Insurance
This is an area, where the amount payable will be high, in case of death claim and normally result into litigation. The role of a nominee in life insurance is to receive the claim amount from the insurance company and distribute it to the legal heirs. Just by being a nominee, one cannot walk away with the entire claim amount.
The policy holder can nominate a person as nominee while he is alive to receive the claim amount in case of his death. The insurance company will settle the amount to the nominee. In case, there is a Will, then the nominee has to settle the amount, as per the Will. If there is no Will, the amount has to be distributed to the legal heirs as per the succession law.
Ideal thing is to nominate a legal heir as the nominee and let him receive the amount from the life insurance company. If other legal heirs are not disputing, he can take the money. If there is a dispute, then the matter will be settled as per the succession law. If you want the entire claim amount to go to one person only, then, you have to go for a Will. If there is no nomination, claim settlement will be tedious and your legal heirs have to run from pillar to post for the claim.
You can change the nomination any number of times during the term of the policy. If you are nominating a minor, don’t forget to appoint an appointee, who can receive the claim amount during the minority of the nominee.
Nomination – Shares
The role of nominee is different in the case of shares. In this case, the nominee will get the right of the shares, in case of death of the party even though he is not the legal heir. So be careful, while making nomination in demat account. Ensure that you are nominating the right person, who will protect your interest after your death.
As per the Companies Act, nomination supersedes Will. So, the nominee in your share investment will become the absolute owner, after your death.
Nomination – Mutual Funds
You can make nomination while investing in mutual funds by writing the relevant details in the application form itself. Later, you have the provision to change the nominee, by submitting the relevant form for that. A minor can be a nominee provided a guardian is specified. Please note that the nomination is Folio specific and if you make any further investments in the same folio, the old nomination is applicable to the new units also.
Nomination – PPF
You can nominate one or more persons as nominee in PPF. Form F can be used to change or cancel a nomination for PPF. Also note that you cannot nominate anyone if you open an account for a minor.
In case of death of the investor without a nomination, if your balance is upto Rs. 1 lakh, it will be settled to the legal heirs of the deceased on receipt of application in prescribed form, supported with necessary documents without production of succession certificate. If the balance is more than Rs. 1 lakh, it is necessary to produce a succession certificate.
Nomination – Bank Accounts
All bank deposits come with nomination facility. While opening a new account, there is a column for nomination in the same form and you should fill it. Note that in case you have not done any nomination till now, you should request your bank branch and nominate a nominee.
Conclusion
To avoid any confusion, better nominate the right person in each of your insurance/investments. Except for Share investments, the nominee’s role is only as a custodian. But if the nominee is the legal heir and it is mentioned in the Will, complications can be avoided. But in the case of Share investments, the nominee will be the beneficiary even if he is not your legal heir. So be careful in nominating the right person in share investments.
But don’t worry, if you have nominated a wrong person. You can change the nomination anytime!
This is an eye opening article and a Must read on nomination. I was under the impression that the nominee is the absolute owner in all financial instruments. I don’t know, why our government is not educating the general public regarding these basic issues which will affect everybody. I congratulate websites like Finvin in doing a great job by educating people, which will affect their daily life. Keep up the good work.I am registering today in your website to do a financial planning for me.
As per the Companies Act, nomination supersedes Will.
What about nominations in
Shares,
Mutual Funds,
PPF,
EPF,
Bank Deposits
Infra Bonds (80 CCF)
ULIPS
Yes.For shares, even if there is a will, the nominee will get the right of the shares.So be careful in nominating the right person in the demat account. In mutual funds, you can have folio wise nominee.In PPF, EPF, Bank Deposit, bonds, ULIPs etc. you can nominate a person, who can receive the money in your absence and give it to the legal heirs.To avoid confusion, make the legal heirs as nominee in a transparent way, which will not lead to litigation among legal heirs.