In India, getting a life insurance policy is not very straightforward when it comes to choosing the nominee for the policy. While there is no need to pick a nominee who is related to you on paper, the process of making the nomination and claiming the proceeds of the policy will not be simple. An Insurable interest test will need to be completed.
What is Insurable Interest?
Insurable interest is the basis of any insurance policy, be it life insurance or otherwise. It helps the insurance company understand what is the intention behind getting something insured.
Does the damage or loss of the insured product or loss of the life of the insured person lead to financial loss and hardship to the nominee? Is the intention to get the policy valid and is it protected against the potential of intentionally causing harm?
If there is no real threat of financial loss, there is no insurable interest.
In case of life insurance, the hardship from the death of the insured can be towards family members, a dependent relative, a romantic partner, creditor or a business partner. The company makes sure that the insurance policy's face value here does not exceed that of the human life of the insured, in a way that it creates a moral hazard to the person's life.
Why a non-family member as a nominee could create complications?
In cases where a close family member like wife or parent is nominated for the life insurance proceeds, the insurance company will not be reluctant about it. However, when a non-family member is listed as the nominee, it raises questions as the chances of fraud are higher.
It is possible to do so if there is a strong case for such a nomination (like the loss of life of the insured would financial affect the nominee due to their dependency) and the insured provides this in a written statement.
For example, if the dependent is a minor and the proposed nominee holds a guardian certificate, then there is an insurable interest.
In fact, the problem does not end at providing a strong written case for a non-family member as a nominee, especially, if a conflict arises with the family members at the time of making the claim.
To make sure that the those intended to receive the benefit get it, the nominees are not always the inheritors of the proceeds but can become the custodians of the money until it is handed over to the legal heirs.
According to the Insurance Laws (Amendment) Act of 2015, when the nominee for the policy is the father, mother, spouse or children of the policyholder, they will not be the mere trustees but the ultimate beneficiaries.
What happens on the death of the insured?
On the death of the insured, the nominee gets the amount. It is here that the insurance company gets a discharge of their legal duty of handing over the claim to the nominee.
However, if there is a dispute (in court) between the legal heir and the nominee, the Indian Succession Act will supersede Section 39 of the Insurance Act.
So, if there is disagreement from the legal heirs after the death of insured (in case of absence of a Will), the nominee will become merely a custodian and not the beneficiary as the legal heirs are entitled to their share of the proceeds according to the laws of succession in India.