If nominees pass away, distribution is governed by succession laws of insured's religion.
Accidents can sometimes result in the tragic loss of an entire family, including the life insurance policyholder, the nominee (typically the spouse), and even the children.
In such emotionally and legally complex scenarios, how are insurance payouts made? Life insurance and legal experts explain the process.
When policyholder and nominee pass away
If the policyholder and the nominee (spouse) pass away in the same accident, the insurance payout does not lapse.
"In such cases, the benefit is directed to the legal heirs of the life assured," says Sanjay Arora, chief of operations, Tata AIA Life Insurance.
Section 39(5) of the Insurance Act, 1938, applies.
"Legal heirs must act through the executor if a will exists, or letters of administration or succession certificate if there is no will," says Shabnam Shaikh, partner, Khaitan & Co
The legal heir of the nominee, proposer, or life assured will have to submit any one of the following additional mandatory documents.
"These could be the nominee's death certificate and succession certificate; will of the life assured or the nominee; or notarised indemnity with affidavit of ₹600 (other than Maharashtra)," says Amish Banker, chief operations officer, ICICI Prudential Life Insurance.
For Maharashtra, affidavit of Rs 1,000, a family tree certificate or legal heirship certificate from the current claimant, along with no no-objection certificate from the remaining legal heirs is required.
Succession laws determine payout
Succession laws determine how the payout is divided. They are in turn based on the deceased's religion.
"If a Hindu male dies intestate (without a will) in an accident along with his spouse (who was the nominee), the policy claim proceeds devolve upon the remaining first-class heirs -- that is, the mother and the children (and families of any predeceased children)," says Rahul Sundaram, partner, IndiaLaw.
If the children have also passed away, the policy proceeds go to the mother.
"If the mother has passed away, then it will pass on to Class II heirs," says Sukrit Kapoor, partner, King Stubb & Kasiva, Advocates and Attorneys.
In case of a Christian male dying intestate, the proceeds are distributed equally among the surviving children. If the male policyholder, his spouse, and children die, the proceeds are passed on to the father.
"In case the father is predeceased, it shall devolve equally upon his mother and siblings," says Sundaram.
In case of a Muslim male, the proceeds devolve upon his surviving children according to the Sharia law applicable to their sect.
If the children also pass away, Sharia law allocates five-sixths of the proceeds to the father and one-sixth to the mother.
If the father is predeceased, the proceeds devolve upon the mother, sister and brother in a proportion defined by the applicable Sharia law of their sect.
Role of will
Disputes related to succession are resolved by obtaining a succession certificate, a probate (if there is a will), or letters of administration (with or without a will).
"These are obtained from the testamentary court, which is followed by a meticulous division of the estate as directed by the court," says Neerav Merchant, partner, Aquilaw.
If a will exists, the estate's representative acts on its behalf.
"The representative of the estate (the executor or the person holding letters of administration) can submit the (probated) will or letters of administration to establish title and receive the proceeds. Thereafter, the representative disburses the proceeds to the legal heirs," says Shaikh.
A probate (court validation of a will) is usually not required, except under specific conditions outlined in Section 57 of the Indian Succession Act, 1925.
"If the proceeds are above a certain threshold, then certain insurers may insist that the will be probated and the executor's title as the representative of the policyholder's estate be determined by a court of law," says Shaikh.
Legal heirs are sometimes required to sign indemnity claims in favour of the insurer.
"This is done to safeguard the insurer's interests and to protect them from any future disputes that may arise," says Shaikh.
Plan nominations carefully
Policyholders should consider naming an appointee if the primary nominee is a minor.
"The appointee should be a responsible adult who will manage the claim proceeds on the minor's behalf until the latter reaches the age of majority (18 years)," says Arora.
Clear and updated nominations ensure smooth disbursal and help avoid disputes.
"The life assured has the option to appoint multiple nominees and define their shares," says Banker. This must be done at the application stage.
Policyholders must update nominations with the life insurer, especially after key life events such as marriage, divorce, childbirth, or the death of a nominee.They may also appoint beneficial nominees.
"Under the Insurance Laws (Amendment) Act, 2015, immediate family members -- spouse, children and parents -- can be designated as beneficial nominees. This gives them absolute rights to the claim amount and protects them against legal challenges from other heirs," says Arora.
Policyholders may appoint someone other than a legal heir as the nominee.
"However, disputes may arise after the policyholder's death between the legal heirs and the nominee," says Kapoor. Sundaram recommends nominating a first-class heir as the nominee.
Merchant says that it is advisable to include a list of contingent nominees, provided all the nominees are aligned with the will.
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