Status of nominee in case of an insurance policy

Generally, we are under an impression that a nominee is a person who is entitled to receive the amount under the policy. But legally, this is not true. As per law, nominee is only a trustee of the assets of the assured.

Section 39(1) of the Insurance Act 1938 states that the holder of a policy of life insurance on his own life may, when effecting the policy or at any time before the policy matures for payment, nominate the person or persons to whom the money secured by the policy shall be paid in the event of his death.

Section 39(5) of the Act says that where the policy matures for payment during the lifetime of the person whose life is insured or where the nominee or, if there are more nominees than one, all the nominees die before the policy matures for payment, the amount secured by the policy shall be payable to the policy-holder or his heirs or legal representatives or the holder of a succession certificate, as the case may be.

The nominee only holds the asset of the insured as a trustee and is legally bound to transfer it to the legal heirs. For example if the father has made his son the nominee in his life insurance policy, then in case the father passes away before maturity of the policy, the proceed/ maturity amount will be distributed between the heirs as per the Succession Act. The son is not entitled to the entire maturity amount of his father’s insurance policy.

In fact, insurance is a contract between the insurer and the insured and hence an insured person appoints a nominee who becomes the caretaker or trustee of the maturity amount in case the insured dies before the maturity of the insurance policy. Legally speaking, in such cases, the insurer pays the maturity amount to the nominee as a discharge of his liability arising out of the contract of insurance.

A situation arises when the nominee does not collect the money as he does not fall under the class of the legal heir. In such case, a nominee may fraudulently ask for a part/portion  in the maturity amount of the policy for withdraw the amount from the insurer. In such cases, the legal heir will have to approach the concerned court for a succession certificate to prove that he or she is the heir to be able to get the money.