A. DEVIKA Vs. SENIOR BRANCH MANAGER, LIFE INSURANCE CORPORATION OF INDIA-(NEUTRAL CITATION NO:2025:MHC:589)
HON'BLE MADRAS HIGH COURT
The Hon'ble High Court held that: when there is a beneficiary nominee, who is validly nominated as per Section 39(7), she will be entitled to make a claim for the entire amount. It is also clear that the liability of the Insurance Company is to disburse the amount to the beneficiary or collector nominee as the case may be.
Let's first understand who beneficiary nominee is and who is collective nominee;
BENEFICIARY NOMINEE
A nominee is a person appointed by insured and mentioned/endorsed in the policy documents, who has authority to receive claim on the death of the insured. A nominee can be any person whether relative or not of the insured. A nominee, if not a beneficial nominee, has right to collect a claim under the policy and distribute it among the heirs of the insured. He/she has no right to keep claim, or maturity proceeds for his/her own use.
A nominee of a life insurance policy is any individual designated by the policyholder as the beneficiary of the policy in the event of the demise of the insured. Usually nominee is a family member, such as a spouse, child, or parent. One of the key features of life insurance is that the policyholder can designate one or more nominees at the time of purchasing the policy. Additionally, the policyholder may change or update their nominee(s) during the policy term as per policy guidelines.
Designating a nominee ensures that the financial proceeds from the policy are directed to the intended recipient. It lends them financial security and support during a difficult time. It is an important step in the life insurance process, offering clarity and security for the policyholder's loved ones.
BENEFICIAL NOMINEE
According to the Insurance Laws (Amendment) Act, 2015, when someone selects immediate family members as the nominee for their insurance plan, the individual(s) is beneficially entitled to receive the claim amount over and above any other person, even if they are a legal heir.
This is why such a nominee is called a beneficial nominee. It is always suggested that you choose family members as beneficial nominees because this gives them an absolute right over anyone else to claim the death benefit.
Under the Insurance Laws (Amendment) Act, 2015, if an immediate family member is nominated, they are beneficially entitled to the claim amount, meaning they have the right to the payout over any other legal heir.
This designation streamlines the claims process and ensures that the intended beneficiaries receive the death benefit, avoiding potential disputes or delays.
PLEASE NOTE: A nominee stands to receive money on the death of an insured, the funds cannot be used unless the nominee is also a legal heir. However, if the insured has appointed a beneficial nominee at the time of policy purchase, the said person becomes the end consumer of the money received under the insurance policy, when a claim arises.
WHO CAN BE APPOINTED AS BENEFICIAL NOMINEE?
As per rules, when buying life insurance, nomination is mandatory. Nominees, such as;
i) Parents,
ii) Spouses, and
iii) Children.
are now considered beneficial nominees, wherein previously, they were categorised as receivers. So, when the insured mentions beneficial nominees in the proposal form, the claim proceeds are undisputed. So, if an insured names any one of them as nominees in a policy, they automatically become beneficial owners of the claim benefits. This also means that they are the final, undisputed beneficiaries, unlike regular nominees (e.g. siblings).
PLEASE NOTE THAT: The concept of beneficial nominees is based on the principle of Insurable Interest. Since only Parents, Spouse and Children of a person have insurable interest in the life of the insured or person.
WHAT IS INSURABLE INTEREST?
A core principle in insurance, it represents the financial stake that you have in insuring something that you own. For example, any damage to your car will result in a monetary loss to you, making it a valid case of insurable interest. It is a prerequisite for issuing any insurance policy.
In the case of life insurance, a policyholder has to demonstrate insurable interest while naming dependents in the policy. Life covers can be issued only if the beneficiaries are likely to face financial crises in the case of life assured's death.
Only spouse, children and parents qualify as beneficial nominees in a life insurance policy as per Insurance Regulatory and Development Authority (IRDAI) rules. This stems from the principle of insurable interest, without demonstrating which, no insurance policy - life or non-life - can be issued.
SECTION 39 OF THE INSURANCE ACT, 2015(Amended)
(1) 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:
Provided that, where any nominee is a minor, it shall be lawful for the policyholder to appoint any person in the manner laid down by the insurer, to receive the money secured by the policy in the event of his death during the minority of the nominee.
(2) Any such nomination in order to be effectual shall, unless it is incorporated in the text of the policy itself, be made by an endorsement on the policy communicated to the insurer and registered by him in the records relating to the policy and any such nomination may at any time before the policy matures for payment be cancelled or changed by an endorsement or a further endorsement or a will, as the case may be, but unless notice in writing of any such cancellation or change has been delivered to the insurer, the insurer shall not be liable for any payment under the policy made bona fide by him to a nominee mentioned in the text of the policy or registered in records of the insurer.
(3) The insurer shall furnish to the policyholder a written acknowledgement of having registered a nomination or a cancellation or change thereof and may charge such fee as may be specified by regulations for registering such cancellation or change.
(4) A transfer or assignment of a policy made in accordance with section 38 shall automatically cancel a nomination:
Provided that the assignment of a policy to the insurer who bears the risk on the policy at the time of the assignment, in consideration of a loan granted by that insurer on the security of the policy within its surrender value, or its reassignment on repayment of the loan shall not cancel a nomination, but shall affect the rights of the nominee only to the extent of the insurer's interest in the policy:
Provided further that the transfer or assignment of a policy, whether wholly or in part, in consideration of a loan advanced by the transferee or assignee to the policyholder, shall not cancel the nomination but shall affect the rights of the nominee only to the extent of the interest of the transferee or assignee, as the case may be, in the policy:
Provided also that the nomination, which has been automatically cancelled consequent upon the transfer or assignment, the same nomination shall stand automatically revived when the policy is reassigned by the assignee or retransferred by the transferee in favour of the policyholder on repayment of loan other than on a security of policy to the insurer.
(5) 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 policyholder or his heirs or legal representatives or the holder of a succession certificate, as the case may be.
(6) Where the nominee or if there are more nominees than one, a nominee or nominees survive the person whose life is insured, the amount secured by the policy shall be payable to such survivor or survivors.
(7) Subject to the other provisions of this section, where the holder of a policy of insurance on his own life nominates his;
i) his parents, or
ii) his spouse, or
iii) his children, or
iv) his spouse and children, or
v) any of them.
The nominee or nominees shall be beneficially entitled to the amount payable by the insurer to him or them under sub-section (6) unless it is proved that the holder of the policy, having regard to the nature of his title to the policy, could not have conferred any such beneficial title on the nominee.
(8) Subject as aforesaid, where the nominee, or if there are more nominees than one, a nominee or nominees, to whom sub-section (7) applies, die after the person whose life is insured but before the amount secured by the policy is paid, the amount secured by the policy, or so much of the amount secured by the policy as represents the share of the nominee or nominees so dying (as the case may be), shall be payable to the heirs or legal representatives of the nominee or nominees or the holder of a succession certificate, as the case may be, and they shall be beneficially entitled to such amount.
(9) Nothing in sub-sections (7) and (8) shall operate to destroy or impede the right of any creditor to be paid out of the proceeds of any policy of life insurance.
(10) The provisions of sub-sections (7) and (8) shall apply to all policies of life insurance maturing for payment after the commencement of the Insurance Laws (Amendment) Act, 2015.
(11) Where a policyholder dies after the maturity of the policy, but the proceeds and benefit of his policy has not been made to him because of his death, in such a case, his nominee shall be entitled to the proceeds and benefit of his policy.
(12) The provisions of this section shall not apply to any policy of life insurance to which section 6 of the Married Women's Property Act, 1874, applies or has at any time applied:
Provided that where a nomination made whether before or after the commencement of the Insurance Laws (Amendment) Act, 2015, in favour of the wife of the person who has insured his life or of his wife and children or any of them is expressed, whether or not on the face of the policy, as being made under this section, the said section 6 shall be deemed not to apply or not to have applied to the policy.
LET'S DISCUSS THE CASE
BRIEF FACTS
1. The Petitioner is the mother of the deceased policyholder, who had listed Respondent No. 2, the wife, as the nominee.
2. As the mother, the petitioner is a Class-I legal heir along with Respondent No. 2 and her daughter, each entitled to 1/3rd share of the deceased's estate.
3. The Petitioner filed this writ seeking to restrain Respondent No.1 Life Insurance Corporation of India, from disbursing the entire policy amount to Respondent No.2(Wife and beneficial nominee in the insurance policy), irrespective of the fact that she had been named the nominee beneficiary.
4. The Respondent No.1, LIC, contended that, in view of Section 39 of the Insurance Act, 1938 (Insurance Act), she was the beneficiary nominated by the policyholder and, therefore, entitled to receive the entire amount as the beneficiary nominee.
5. Respondent No. 2(Wife and beneficial nominee in the insurance policy), submitted that she had no objection to granting a 1/3rd share of the amount due to the Petitioner and releasing the remaining 2/3rd share to herself, which would include the share of the minor daughter.
OBSERVATIONS AND DECISION OF THE COURT
6. The to the decision of the Andhra Pradesh High Court in Mallela Manimala v. Mallela Lakshmi Padmavathi (2023) where it had been held that the beneficiary nominee would be entitled for the amount as if her own and would not receive the amount as in the case of a 'collecting nominee', who only receives in trust to be distributed to all the legal heirs.
7. The Court observed, "…when there is a beneficiary nominee, who is validly nominated as per Section 39(7), she will be entitled to make a claim for the entire amount. It is also clear that the liability of the Insurance Company is to disburse the amount to the beneficiary or collector nominee as the case may be."
8. In view of the submission of Respondent No.2 that 1/3rd of the amount would be given to the Petitioner, the Court said, "When the beneficiary nominee, who is arrayed as the second respondent herself in this Court, has categorically made a submission that 1/3rd of the amount shall be given to the petitioner and that she will receive the 2/3rd amount, there is no question of pressing into service the law laid down with reference to Section 39 of the Insurance Act, 1938.."
DECISION
The Court, therefore, disposed of the writ petition with a direction to Respondent No. 1(LIC) to disburse the entire amount due under the policy, with 1/3rd of the said amount to be disbursed to the Petitioner, and 2/3rd of the said amount to be disbursed to the Respondent No.2(Wife of the insured).
CONCLUSION
The IRDAI has made mandatory nomination at the time of inception of life insurance policy. A nominee can be any relative of a person ,who has insurable interest in life of the insured. But Insurance Amendment Act, 2015 Section 39(7) defines the concept of "Beneficial Nominee", which includes Parents, Spouses and Children of insured. Since a nominee not being a Beneficial Nominee collects maturity /death proceeds from insurance policy as a trustee and distribute the same among heirs of deceased. But a Beneficial Nominees has absolute right on maturity/death proceeds from insurance policy. He/she can use the same for his won benefit and there is no need to distribute the same among heirs of deceased.
Disclaimer: the case law presented here is only for sharing information with readers. The views expressed here are personal views of the author, shall not be considered as professional advice. In the of necessity do consult with professionals.
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