Is Nominee A Custodian Or Owner Of Insurance Proceeds? Allahabad High Court Clarifies

The Allahabad High Court has recently clarified that a beneficial nominee in an insurance policy does not automatically gain ownership rights over the policy's proceeds. Instead, such a nominee holds the amount in trust for the legal heirs of the policyholder. 

So in the case of Smt. Kusum v. Anand Kumar & Others, the Hon'ble Court has said that unless the nominee can provide a will, gift, or any other legal entitlement, they must hold the amount in a trust for legal heirs. 

No, naming someone as a 'beneficial nominee' does not guarantee that they will receive and keep the insurance payout. In the case of Smt. Kusum v. Anand Kumar & Others, the Hon'ble Court has emphasized that unless the nominee can prove a will, gift, or other legal entitlement, they must hold the amount in trust for the legal heirs.

Recently, in a case in the Karnataka High Court, it had also been ruled that nomination shall not override the rights of legal heirs. 

"Nominee is a caretaker of the funds and has the responsibility to distribute it amongst the legal heirs of the policyholder, whereas a legal heir is a beneficiary of the assets and has the legal right to inherit the assets," says Apeksha Lodha, partner, Singhania & Co. 

There are conflicting judgments of various High Courts on Section 39(7) of the Insurance Act, as the Legislature does not define and distinguish between a nominee and a beneficial nominee. "However, the Supreme Court in judgments pertaining to different statutes settled the debate on the rights of a nominee and a legal heir, holding that being designated as a nominee does not automatically make you the beneficiary," says Lodha. 

The policyholders should draft a will to ensure that the policy money goes to the intended person after their death.

What Policyholders Need To Know 

If a policyholder wants to ensure that the money from their insurance policy goes to the intended recipient after their death, he or she must execute a valid will which should clearly indicates who the insurance proceeds should go to. As per the judgment for Smt. Kusum v. Anand Kumar & Others., mere nomination is not enough to transfer beneficial interest. Legal instruments like Will ensure that the deceased's wishes are followed.