We all know that nomination is the best way to protect your investment to reach your near and dear. But do you know each product have it’s own meaning and definition of nominee? So let us understand those rules in simple ways.
1) Nomination for Life Insurance-Nominations in Life Insurance are governed under the rule Sec 39 of Insurance Act 1938. In simple lines we can say that, you can appoint more than one nominee in Life Insurance to receive policy amount in the event of the policy converting to death claim. But will nominee be a legal owner of claim amount? No…he is just a caretaker of assets. He can hold assets as a trustee and final distribution will be based on legal heir. For example, suppose Mr.X who is married, took life insurance policy and nominated his father as nominee. In such case who will be legal beneficiary of claim amount? Eventhough Mr.X nominated his father as the nominee, still his wife who is the legal heir class I will be the legal beneficiary of the claim amount. Mr.X’s father is just can act as if the trustee to transfer the claim amount to his wife.
Now in above case if Mr.X have 2 children then still his wife be the sole beneficiary of claim amount? No, because his widow and 2 children form the legal heir I category according to Hindu Succession Law. So his widow and 2 children will have to distribute the claim amount equally.
But keep in mind that if Mr.X have will then Hindu Succession Act will be considered as secondary. Will is considered as the major document to distribute the claim amount.
2) Nomination for Bank Accounts and other Govt Saving instruments–According to Section 45ZA(2)(Banking Regulation Act), nominee merely get exclusive right to receive money from bank. But he is not the the owner of money. But point to be noted here is, banking laws will not concerned about succession acts. Hence banks responsibility end once they transfer the amount to nominee. But it is the nominee’s legal responsibility to act as a trustee and transfer the money according to succession act.
3) Nomination for Mutual Funds–In mutual funds you can nominate upto 3 nominees for single folio and even you can distribute the % of sharing. Nowadays it is mandatory for mutual fund investors to specify whether they want to nominate or not. If they don’t want to nominate then they need to declare it by signing. If they want to nominate then they need to declare atleast one nominee. Here also nominee acts as if the trustee but not as a real beneficiary of amount.
4) Nomination to PPF-It is very important to exercise nomination facility for PPF account. If account holder dies and there is no nomination at the time of death, the balance in the account, if it is upto Rs.1,00,000, will be paid by the Accounts Office to the legal heirs of the deceased on receipt of application in Form G supported with necessary documents without the production of succession certificate. If the balance is more than Rs.1,00,000 then production of Succession certificate is mandatory.
5) Nomination to your shares-One of the different and interesting rules applies to your shares only. Here nominee will be the legal owner but not the legal heirs. Suppose Mr.X nominated his brother and died without will then eventhough his wife will be considered as legal heir I category but his brother will be treated as the owner. So when making nomination you need to take care that your nominee will be legal heir, else create a will to whom those shares to be transfer in case of your death.
Reason for such change is, different acts. In case of shares, Section 109(A) of the Companies Act and 9.11 of the Depositories Act, nominee will be treated as the legal owner in case of death of the deceased.
So based on each asset class and product you are investing, read fully what do you mean by nominee and accordingly nominate. It is fatal if blindly you nominate thinking that your nominee will receive all your money in case of your death.