Term insurance plans in India are an already popular life coverage option. The main reason for buying term insurance is to make sure that your family does not have to struggle financially if something unfortunate were to happen to you.

When buying a term plan, it is important that you are well aware of all of its features and aspects that make the plan function smoothly. One of these is the ‘nominee’. Let’s look at term insurance nomination and why it matters.

Who is a nominee?

As per its simplest description, a nominee is someone that inherits any asset or belonging that was owned by the nominator. In the case of term insurance, the meaning of the word refers to a person to who the insurance company will give the benefits of the policy. In the case of a claim, the insurance company will consider the beneficiary as the point of contact for the claim settlement formalities. In most cases, it is someone from the policyholder’s immediate family. This can include the spouse, children, or parents. However, many insurance providers allow policyholders to list relatives like uncles or nephews as the point of contact for the policy.

Hence, when you buy a term insurance policy, you have to be careful of who you name as the nominee of your policy. Moreover, the person that you select as the beneficiary should also have policy documents to facilitate faster claim approval if the need arises. In addition, there are also term insurance tax benefits to consider. The tax benefits are subject to whether you follow the insurance policy’s guidelines in different processes. Hence, if you select a non-family member as a beneficiary, parts of the policy might be affected. 

Who should be your nominee?

A nominee essentially receives the sum assured as the death benefit. Ideally, a member of your family should be listed as one. However, if you do not want to rely on a single family member to deal with the claim formalities, you can list multiple members of the family as beneficiaries. You can specify the amount or the percentage of the total benefit that each beneficiary will get.

There may be a few benefits to naming multiple nominees. Firstly, this avoids any dispute that may arise among your family members when it comes to claiming the money. Secondly, it can also happen that your beneficiary passes away before you do. In that situation, there is another person that can receive the claim amount. In the case that you nominate your minor children, the claim benefit situation can be different. Being minors, they cannot be given the claim amount until they are 18 years of age. Until then, the benefit will be assigned to an adult custodian chosen by you.

If you do not provide a beneficiary while buying the policy, your legal heir is assumed to be the nominee and is given the policy benefit by the insurance providers.

Why should you avoid nominating non-family members?

Insurance providers are reluctant to issue policies if someone other than a close family member is named as the nominee. It is the policy of most insurance companies that they will not include any non-family members as any part of the coverage to the insured. The reason for that is straightforward. Any type of life insurance is purchased to ensure the financial security of the policyholder’s family.

Hence, if you nominate someone who is not a close relative, it will alarm insurance providers and affect the buying process of your term plan. Situations like this signal a higher risk of fraud to the insurance provider. Even though it is an alarming situation, many insurance providers still approach such proposals with an open mind. Insurers can issue a policy if the policyholder can provide the right assurances, like a strong reason for the nomination and the beneficiary being dependent on the policyholder. However, your policy might cost you more in this case. Tools like term insurance calculator can help you understand the difference. If your case is convincing to the insurance provider, they will accept your proposal for buying the right term insurance policy.

However, your troubles might not be over even after the life insurer accepts someone who is not a close relative as a nominee. If they are not a legal heir, your beneficiary may have to contend with disputes involving family members at the time of claim payout. For example, if you choose your fiancée to receive the benefit in your policy, there might be disputes at the time of claim, as they are not considered your family member until they are married to you. 

The nominee is essentially the most secured person in your policy. Hence, the question is whether you can secure a non-family member under term insurance. The answer is YES, but it will need some additional effort. To make the nomination effective, you will have to create a will that makes your position on who the ultimate beneficiary of your claim proceeds is very clear. In the absence of such a will, the nominee would receive the insurance benefit but would be obliged to pass it on to the legal heirs of the policyholder.