Say you buy a life insurance policy and add your wife as the nominee. You’d assume that upon your demise, your wife would automatically receive the death benefits of your policy. However, the answer is not as simple as it seems, since the law clearly distinguishes between a nominee and a legal heir. This difference could even mean your wife might not be the sole beneficiary of proceeds despite being your appointed nominee.
So, what are the major differences between a legal heir and a nominee, and who has a better claim on your assets once you’re no more? Read on to know all about a nominee and legal heir and who has a higher claim on your insurance money upon your demise.
Who is a nominee?
The nominee is an individual whom the insured person has appointed to receive funds upon their death.
The law specifies that while the insurance amount can be received by the nominee, the rightful claim on this amount only remains with the legal heirs of the deceased. In other words, nomination does not automatically make the nominee the ultimate beneficiary. A nominee typically acts as a custodian, trustee, or receiver of funds, and not as the ultimate owner of the asset or its rightful inheritor.
“Under Section 39(7) of the Insurance Act, 1938, an insurance company is liable to pay the insurance proceeds to a validly nominated beneficiary. However, the nominee holds the amount in trust for the legal heirs of the deceased. As per personal laws, such as those applicable to a Hindu male dying intestate, the estate devolves equally upon Class I heirs—namely, the mother, wife, and children. The same principle applies to nominations under fixed deposits. If a nominee refuses to release the funds to the rightful heirs, the legal heirs may seek remedy through a court of law”, says Rahul Sundaram, Partner, IndiaLaw LLP
However, in the case of Devika v. Senior Branch Manager, LIC, in 2023, the Madras High Court drew a clear distinction between a beneficiary nominee and a collector nominee. In their words, “If the nominee falls within the scope of Section 39(7) of the Act, those persons described therein automatically take it as a beneficiary nominee. If the person does not fall within the scope of Section 39(7) of the Act, he/she can only be treated as a collector nominee, and they have to hold the money in trust, subject to the claims made by the legal representatives who are entitled to a share in the sum assured.
Section 39 of the Insurance Act deals with nominations in insurance policies. According to the rules, if the insured policyholder nominates either
Their parents
Spouse
Children
Children and spouse
Or any of them.
Those who do not fall under this ambit of relationship with the insured are seen as collector nominees.
The case of Devika v. Senior Branch Manager, LIC, involved the division of the death benefit proceeds of Dr. Maheshwar, who passed away in 2016. He had nominated his wife as beneficiary under the policy, which received a legal challenge from his mother. Since both of them fall under the category of beneficiary nominee, the court awarded 1/3 of the insurance amount to the mother and 2/3 to the wife, including a share for her minor daughter.
Even in the cases of fixed deposits, shares, or mutual funds, nomination is seen as a procedural mechanism, and the banks and financial institutions are discharged of their liability once they release the funds in favor of the nominee as custodian, who is expected to discharge his obligation of giving money to the right legal heirs.
In case the nominee does not fulfill his/her obligation, a legal heir can take the legal route. “Legal heirs may challenge any retention of funds by the nominee. In certain cases, like employee provident funds or gratuity, nominee rights may be governed by the given statute,” explains Vishal Gehrana, Advocate on Record, Karanjawala & Co.
Can I approach the insurance company to receive the funds if I am the legal heir?
No. In the same case, the Madras High Court also made it abundantly clear that the job of the insurance company (in this case, LIC) is limited to disbursing the funds to the appointed nominee.
“By handing over the sum assured to the nominee, the job of the insurance company comes to an end. Thereafter, it is not the concern of the insurance company to see as to who has the rightful claim over the sum assured and whether it actually goes into their hands as per the personal law governing the parties,” the judgment noted.
Insurance companies, as well as banks and mutual funds, are not required to investigate or identify the legal heirs.
Under which conditions can a nominee assert a legal claim to keep the money?
Explains Dinesh Jotwani, Co-Managing Partner, Jotwani Associates, there are only 4 conditions under which a nominee can also be designated as the legal heir, and hence, retain the funds
If the nominee is also the sole legal heir
If the deceased executed a registered will bequeathing the asset to the nominee, i.e., if the nominee can establish the deceased’s express intent not to let his natural legal heirs have this proceed
If a gift deed or similar legal instrument was executed during the deceased’s lifetime.
If laws specific to the asset (e.g., the EPF Act) make the nominee the beneficial owner.
Who qualifies as a legal heir?
Legal heirs are those individuals entitled under succession laws to inherit the property of a deceased person. These vary, depending upon the insured’s religion.
“Under the Hindu Succession Act (1956), Class I heirs, who have first right on the property of the deceased if they die without a will, include spouse, son, daughter, and mother. This also includes adopted children. In Islam, succession is governed by personal law. Multiple wives (up to four) are recognised, and children from each wife inherit the property in specified shares. Under Christian and Parsi laws, spouses and lineal descendants inherit according to the Indian Succession Act, 1925,” explains Jotwani.
Do separated spouses, step-siblings count as legal heirs?
Experts say that even separated spouses continue to be considered as legal heirs unless categorically divorced by law. On the other hand, stepchildren are not considered legal heirs unless they have been officially adopted by the individual concerned.
This was established recently in the case of Rajni Rani v. State of U.P. In 2012, when Bhojraj Singh passed away, his appointed nominee and partner, Rajni Rani, laid claim to retirement benefits. The Allahabad High Court ultimately granted Singh’s legally wedded, albeit separated, wife, Usha Devi, the right to family pension, noting that mere nomination does not write off the right of a legally wedded spouse under succession law.
So, what are the major differences between a legal heir and a nominee, and who has a better claim on your assets once you’re no more? Read on to know all about a nominee and legal heir and who has a higher claim on your insurance money upon your demise.
Who is a nominee?
The nominee is an individual whom the insured person has appointed to receive funds upon their death.
The law specifies that while the insurance amount can be received by the nominee, the rightful claim on this amount only remains with the legal heirs of the deceased. In other words, nomination does not automatically make the nominee the ultimate beneficiary. A nominee typically acts as a custodian, trustee, or receiver of funds, and not as the ultimate owner of the asset or its rightful inheritor.
“Under Section 39(7) of the Insurance Act, 1938, an insurance company is liable to pay the insurance proceeds to a validly nominated beneficiary. However, the nominee holds the amount in trust for the legal heirs of the deceased. As per personal laws, such as those applicable to a Hindu male dying intestate, the estate devolves equally upon Class I heirs—namely, the mother, wife, and children. The same principle applies to nominations under fixed deposits. If a nominee refuses to release the funds to the rightful heirs, the legal heirs may seek remedy through a court of law”, says Rahul Sundaram, Partner, IndiaLaw LLP
However, in the case of Devika v. Senior Branch Manager, LIC, in 2023, the Madras High Court drew a clear distinction between a beneficiary nominee and a collector nominee. In their words, “If the nominee falls within the scope of Section 39(7) of the Act, those persons described therein automatically take it as a beneficiary nominee. If the person does not fall within the scope of Section 39(7) of the Act, he/she can only be treated as a collector nominee, and they have to hold the money in trust, subject to the claims made by the legal representatives who are entitled to a share in the sum assured.
Section 39 of the Insurance Act deals with nominations in insurance policies. According to the rules, if the insured policyholder nominates either
The case of Devika v. Senior Branch Manager, LIC, involved the division of the death benefit proceeds of Dr. Maheshwar, who passed away in 2016. He had nominated his wife as beneficiary under the policy, which received a legal challenge from his mother. Since both of them fall under the category of beneficiary nominee, the court awarded 1/3 of the insurance amount to the mother and 2/3 to the wife, including a share for her minor daughter.
Even in the cases of fixed deposits, shares, or mutual funds, nomination is seen as a procedural mechanism, and the banks and financial institutions are discharged of their liability once they release the funds in favor of the nominee as custodian, who is expected to discharge his obligation of giving money to the right legal heirs.
In case the nominee does not fulfill his/her obligation, a legal heir can take the legal route. “Legal heirs may challenge any retention of funds by the nominee. In certain cases, like employee provident funds or gratuity, nominee rights may be governed by the given statute,” explains Vishal Gehrana, Advocate on Record, Karanjawala & Co.
Can I approach the insurance company to receive the funds if I am the legal heir?
No. In the same case, the Madras High Court also made it abundantly clear that the job of the insurance company (in this case, LIC) is limited to disbursing the funds to the appointed nominee.
“By handing over the sum assured to the nominee, the job of the insurance company comes to an end. Thereafter, it is not the concern of the insurance company to see as to who has the rightful claim over the sum assured and whether it actually goes into their hands as per the personal law governing the parties,” the judgment noted.
Insurance companies, as well as banks and mutual funds, are not required to investigate or identify the legal heirs.
Under which conditions can a nominee assert a legal claim to keep the money?
Explains Dinesh Jotwani, Co-Managing Partner, Jotwani Associates, there are only 4 conditions under which a nominee can also be designated as the legal heir, and hence, retain the funds
Legal heirs are those individuals entitled under succession laws to inherit the property of a deceased person. These vary, depending upon the insured’s religion.
“Under the Hindu Succession Act (1956), Class I heirs, who have first right on the property of the deceased if they die without a will, include spouse, son, daughter, and mother. This also includes adopted children. In Islam, succession is governed by personal law. Multiple wives (up to four) are recognised, and children from each wife inherit the property in specified shares. Under Christian and Parsi laws, spouses and lineal descendants inherit according to the Indian Succession Act, 1925,” explains Jotwani.
Do separated spouses, step-siblings count as legal heirs?
Experts say that even separated spouses continue to be considered as legal heirs unless categorically divorced by law. On the other hand, stepchildren are not considered legal heirs unless they have been officially adopted by the individual concerned.
This was established recently in the case of Rajni Rani v. State of U.P. In 2012, when Bhojraj Singh passed away, his appointed nominee and partner, Rajni Rani, laid claim to retirement benefits. The Allahabad High Court ultimately granted Singh’s legally wedded, albeit separated, wife, Usha Devi, the right to family pension, noting that mere nomination does not write off the right of a legally wedded spouse under succession law.
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