Which way to go with in life insurance policies?

Everyone wishes to provide security to their loved ones even after they’ve passed away. This is why we opt for life insurance policies, so our surviving family members won’t have to face financial struggles in the case of our demise. The big concern for many of us is determining how to transfer the proceeds of such policies to our loved ones. The two popular methods used by policyholders for the transfer of insurance payouts are Nomination and Assignment.

Let's take a look into the details of each method:

Nomination:

Under the new Insurance Laws (Amendment) Act, 2015, there are two categories - 'beneficial nominee' and ‘collector nominee’. If you nominate someone as your beneficial nominee, this nominee becomes the beneficiary of your policy and won’t have to share the insurance money with other legal heirs. As a policyholder, you are free to appoint multiple 'beneficial nominee/s', mentioning each one’s share. Keep in mind that it’s necessary for beneficial nominee/s to be a family member such as spouse, parents, and children.

If you nominate someone as a 'collector nominee', this nominee will simply receive the policy payout from the insurance company and will have to facilitate the transmission to the legal heir/s, which may happen based on country/state succession laws.

Assignment:

This refers to the transfer of your rights on an insurance policy to another person. Once you assign the insurance policy to somebody else, he/she becomes the owner of the policy. The catch here is that once the assignment has been done, it cannot be revoked. After assignment, the assignee will be eligible to receive the proceeds from the policy, and not you, even if you survive the tenure, (unlike nomination).

The assignment of life insurance policies can also be used as collateral while taking a loan. If an insurance policy is assigned to the lending bank and the policy holder expires during the tenure, the insurance company shall pay the outstanding loan amount to the bank and the remainder (if any) will be paid to the legal heirs of the policy holder. In this case, if the holder survives the tenure, the bank will reassign the policy back to him/her.

How should you transfer the proceeds of your life insurance policy?

PersonalFN believes that if you are absolutely sure of whom you want to transfer your policy proceeds to and trust that person completely, you may opt for assigning the policy. This method will ensure the transfer of money to your chosen beneficiary without any legal disputes coming up. Moreover under the assignment method, it is also possible to ascribe your policy to a third party. It is necessary to know that once it has been assigned, a policy cannot be taken back, unless the assignee himself reassigns the policy back to you.

If you are unsure, it is better to opt for the nomination method. Along with this, prudently make a Will and mention the name of the beneficiary of your policy in a clear manner.

PersonalFN believes that undertaking proper estate planning is extremely important if you wish to transfer all of your assets to your loved ones easily, without having them go through intricate legal formalities and disputes. In this endeavour, it’s wise to seek the advice of a lawyer who has the expertise of carrying out such activities (internationally/nationally) to ensure that you make informed decisions and complete any necessary paperwork.

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