Term plan insurance is another name for pure life insurance cover given for a specific period although the definition has now evolved with the introduction of whole life policies that extend until the age of 99. Term insurance has multiple purposes and objectives.
a) At its core, a pure life insurance policy is a risk mitigation mechanism to financially safeguard the family in case of the unfortunate demise of the sole income earner. The Sum Assured helps the family stay afloat for at least the next 10-15 years or even more depending on the lifestyle expenses and cost of living.
b) A term insurance policy is also availed against specific debts such as home loans so that the outstanding loan is set off with the amount received from the insurance claim. The Sum Assured, in this case, however, is always equal to the balance outstanding on the loan in the year of demise.
c) With term insurance being offered for longer durations, it is a financially lucrative instrument to create an inheritance for child/ren. If you invest Rs.12,000 each year starting at 30, you can leave behind a lump sum corpus of Rs. 1 Crore even if you pass away only towards the end of the policy term, i.e., when you are about 70 years old. All conventional and conservative asset classes can give a modest return of Rs.15lakhs with the same investment in the same period.
Importance of Including a Nominee in a Term Insurance Plan
Appointing a term insurance nominee is important but you may be wondering who can be a nominee in term insurance. The nominee should be someone who will be financially affected in case of your unfortunate demise. This implies that friends and relatives will generally not qualify to become nominees unless you can clearly demonstrate an insurable interest. This rule also safeguards you from any moral hazards.
Insurance, unlike banking, differentiates “beneficial nominees” from nominees because “beneficial nominees” become rightful owners of the claim amount as against “nominees” who are mere custodians to distribute the amount to the legal heirs or as per the will of the deceased.
Selecting Your Term Insurance Nominee
Presuming, for argument’s sake, that the policyholder has not mentioned the nominee name, then the law takes its course and the insurer has to follow specified legal procedures to avoid disputes from any quarter. So, who can be a nominee? As per law, the spouse, son, father and mother are defined as legal heirs. Ergo, they are first (in the specified order) entitled to receive the Sum Assured.
However, if the nomination is not done but will is available, the money will be as per the declaration given in the will. The insurance company will take an indemnification declaration, before disbursing the money, to safeguard itself from getting entangled in court cases.
What if Your Nominee Dies Before Claim?
Case 1: Nominee dies. The insured person is alive. The policyholder updates nomination details and the policy continues without any hassles.
Case 2: The insured person dies. Nominee dies before claiming the Sum Assured. The Sum Assured then gets paid to the legal heirs.
Can You Change Nominee in Term Insurance?
Incorrect nominee information can cause trauma to the family that is already grieving your loss. To avoid legal impediments, it is better to keep nominee details up to date. Updating the nomination is certainly an option provided by all insurers, but the latest nomination is considered valid and all the earlier nominations are automatically invalidated. There is no upper limit on the number of times that you can change the nomination details.
An online or offline application for change of nomination should be made and submitted to the insurance company. The insurance company then acknowledges receipt of application via a letter or an email. This acknowledgement should be kept safely for records.
Can You Nominate Grandchildren in Whole Life Term Plans?
Minor (grand) children can be listed as nominees provided there is a guardian that is appointed as an “attendee”. The policyholder should provide accurate, verifiable information pertaining to the attendee. If details are inaccurate, the claim may not be settled. In case the insured person dies when the nominee is still a minor, the attendee receives the Sum Assured.
Nomination in Policies Under MWP Act
Rupesh has raised a business loan of Rs. 2 Crore to scale up his fledgling venture. He has also availed of term insurance of Rs. 3 Crores to financially protect his spouse and children in case of his demise. His biggest worry? Will his creditors raise a legal claim on the insurance amount to offset the loans?
The Married Women Property (MWP) Act, 1874 comes to such people’s rescue if the insurance policy comes under the purview of this act. Such policies can have only wife/children as beneficial nominees and the Sum Assured cannot be used to clear loans.
Nomination is of utmost importance in a term insurance policy because, in the first place, you avail a term plan to let your family live without worrying about money. If nomination details are incorrect, you are adding to their woes when they are already trying to cope up with the mental stress of losing you.