A term insurance plan offers financial cover in case of an unfortunate event during the policy term. This coverage is provided to the nominee mentioned in the policy. A nominee is generally a family member, such as a spouse, child, sibling or parent. It could also be an extended family member like an in-law, cousin, uncle, aunt, niece or nephew.
The nominee plays a critical role in a term insurance plan and must be chosen carefully in order to ensure complete financial security of your loved ones.
Nominees for term insurance policies can typically be categorised into the following types:
Family nominees: These are individuals whom you are legally related to, such as your spouse, parent or children. In most cases, people choose to appoint their family members as nominees for their policy.
Non-family nominees include individuals you are not legally related to, such as a colleague, neighbour or friend. Unmarried individuals with no next of kin often select non-family nominees for their term policy.
Minor nominees: Minor nominees refer to individuals who are under the age of 18 and are not considered adults. Parents may nominate their underage children as beneficiaries of their term life insurance.
Multiple nominees: Policyholders have the option to name multiple people as the nominee. The maximum number of nominees can differ for each plan, and you are advised to check the same with the insurance company.
Below are some points to keep in mind when selecting a nominee for your term insurance plan:
Assess your family's situation: When selecting a nominee for your term plan, it is essential to assess your family's situation. Your choice of nominee can differ based on your personal situation, family dynamics and financial dependency. For instance, you may want to nominate your parents if you are single. However, if you are married, you may want to secure your spouse and children financially.
Evaluate future needs: It is important to evaluate and understand the future financial needs of your dependents. For instance, while your parents may not be around to claim the insurance benefit in the future, your children will likely require financial assistance for an extended period. Also, unlike parents, who may be financially independent or have other sources of support, children typically rely heavily on their parents for financial assistance.
Designate distinct percentages: In the case of multiple financial dependents, you have the option to select more than one nominee. For example, you can appoint your spouse and two children for the same term insurance plan. However, in this case, it becomes essential to designate distinct percentages for each person. For instance, you can allot 50% for your spouse and 25% each for your children.
Below are some things to remember when appointing a nominee:
Make sure the name matches your will: To avoid legal complications in your absence, it is essential to ensure consistency between the names of your nominees in both your will and insurance documents. It is not uncommon for individuals to overlook updating their wills or mistakenly name different beneficiaries in their wills compared to those listed on their policy documents. Such discrepancies can lead to confusion, family feuds and lengthy legal battles.
Appoint a guardian in case of a minor nominee: If you are appointing a minor as the nominee of your term life insurance plan, you also need to appoint a legal guardian. The guardian oversees the affairs of your estate and ensures the child receives the insurance payout as intended. It is essential to select a trustworthy and reliable person as the guardian to protect the financial interests of your child.
Update the nominee's name in case of any change in your personal life: If there is any change in your personal relationships, you must update the same on your term insurance plan as well. For example, in the event of a divorce or the passing of a spouse, it is crucial to remove their name from the policy document and make necessary updates. This ensures that your insurance coverage accurately reflects your current circumstances and beneficiaries.
Inform the nominee: It is crucial to inform the nominee you are appointing of your decision. This helps eliminate confusion and ensures that they are aware of their role in raising a claim in your absence. Additionally, it is advisable to inform them about the claim process to prevent any potential hassles later on.
If there is no nominee on your term insurance plan, the insurance company has the right to offer the payout to your legal next of kin, such as your spouse or child. In some cases, the insurance company may also refer to your will and decide to give the insurance proceeds as directed in your will.
To sum it up
It is crucial to carefully assess your family's needs before assigning a nominee. Term insurance offers a high sum assured, and decisions involving such significant amounts require careful consideration. Talking to your family members and understanding their future needs, including health requirements, can help you make an informed choice. Additionally, it is important to update the beneficiary's name whenever necessary to ensure that the right person receives the money in your absence. Utilizing a term insurance calculator can also aid in accurately assessing your coverage needs.