Nominate or Assign?
One of the prime reasons to take a life insurance policy is to ensure that your financial dependents are provided for. This is possible if you ensure that you have made the right nomination, which ensures that the policy proceeds go to the right person. A nominee is chosen at the time of buying a policy, when the policyholder fills the details of the nominee. As a policyholder, you have the flexibility to change the nominee during the tenure of the policy on as many times as you wish.
One of the reasons to get a nomination filled at the time of taking a policy is to check on any disputes that may arise on who receives the policy proceeds at the time of the policyholder’s demise. In fact, a correct nomination establishes clear title to the policy at the time of the policyholder’s demise.
A nominee can be anyone—spouse, children, relatives, friends, even people who are not directly related to you. One needs to provide the insurer the person’s details such as the full name of the nominee as it appears in his official documents, address, age and the relationship between the nominee and the policy holder. However, if the nominee is a minor, an appointee is required since they are ineligible to receive claims directly. To ensure a smooth transition, one should not nominate unrelated parties—those who do not have an insurable interest in the life of the policyholder; as such a move could lead to cheating or malpractices.
In contrast, assignment of a life insurance policy means the policyholder transfers the rights of his insurance policy to someone else for various reasons. The policyholder is called the assignor and the one to whom the policy has been assigned is referred as the assignee. Most often, assignment comes into play when the policyholder tries to use the life insurance policy as collateral against a loan. In such cases, once the rights have been transferred to the assignee, the assignor has no right on the policy, and the assignee becomes the owner of the policy. To ensure validity— assignment must be in writing and a notice to that effect must be given to the insurer.
Under the new Insurance Act, 2015, even in case of an assignment for a loan, the original nominee stays. This way, in case of a claim, the insurer pays the borrower the sum owed by the policyholder and the rest to the nominee, which safeguards the interests of the nominees even in case of an assigned policy.