Magazine Cover Stories Special Features May 2000

Nominate, as you invest

There was a glow of happiness and satisfaction on Mrs. Romilla Sharma's face. Her son had secured first position in the MBBS and she got her daughter married to an IAS officer. A great achievement, indeed. Specially for a woman who had done it all alone, without her husband beside her to fight the hurdles and overcome all obstacles. Mrs. Sharma could achieve all this due to her determination. But we can not overlook the fact that her husband had made a wise decision by making her his nominee for all his insurance, PF, PPF, and bank accounts. He had even registered his will in her favour. During his life time, Mr. Sharma had made the right provision for his family in case of any eventuality.

Law of nomination has undergone drastic changes in the recent past. Now, nomination can be made in respect of almost all investment and savings options like shares, fixed deposits, mutual funds, provident fund accumulation, LIC policies, National Savings Certificate and PPF.

One has to be very careful while choosing a nominee. Any hasty decision can give rise to sticky situations, and create disturbances in the family. Such a situation can be averted by making a proper will. There is a common belief that a nominee is the rightful person to receive and keep money. However, in the hands of law it is completely the other way around. To understand this let us first understand few relevant Acts.

Nomination pattern differs under different Acts.First of all, we should know who is a nominee. Nominee is the person in the proposal form to whom the insurer (LIC/GIC) pays the assured sum in case of the death of the assured. Under the Insurance Act 1938 nominee is just a trustee, who receives the money due, under the policy, for the benefit of the legal heirs of the deceased. He does not get the sole authority to the insured money. A court of law is under obligation to protect the right of the legal heirs of the deceased. This was settled by Supreme Court in the case of Sarbati Devi vs. Usha Devi (Air 1984, Section 346) .

In this case, Usha Devi's husband insured his life and nominated her to receive the sum assured on his death. When he died, he left three legal heirs - his wife, son Ashok Kumar and mother Sarbati Devi. Since Usha Devi was his nominee, she claimed absolute right to the sum assured, excluding the other two heirs, - the son and the mother of the deceased. The Supreme Court dismissed her claim holding "a mere nomination made under Section 39 does not confer on the nominee any beneficial interest in the amount payable under the life insurance policies on the death of the insured".

Under the labour welfare laws, the right to nominate is restricted. In the case of an employee having no family, nomination can be made in favour of any person. But as soon as there is an addition of a member in the family, the previous nomination becomes void.

According to PPF Act 1968, the nominee can claim the entire amount, whether he is a family member or not. If there is no nomination, the amount is payable to his legal heirs. It is advisable here to nominate one's spouse as nominee. In case the account is opened before the marriage, nomination can be changed after marriage.

The legal position of a nominee remains the same under the property law also. Here, the nominee is only a trustee and after the death of a member, all the heirs to whom a share in the said property has been bequeathed, will have right of succession to the property. The legal heirs cannot be excluded by the nominee. But in such cases, a registered will is required for making necessary changes. Under Companies Act 1956 (amended in October 1998), a nominee has all the rights of ownership. Here, too the spouse should be appointed as the nominee in order to be on the safer side.

The policy holder or the owner of the fund or property retains the complete power of disposition during his life time, or by a will, which operates after his death. It should not be misunderstood that nominee gets all the power and can exclude the legal heirs. The court safe guards the rights of the legal heirs, the registered will makes it easier. The law of nomination should not be ignored but should be understood to safeguard the legal rights.

In the end, a word of advice for investors: Mark nominees as you invest. At the time of investment, make it a joint holding with the person to whom you wish your investment should go in case of any eventuality. Just as you would do in case of bank accounts, lockers, property, life and general insurance, PF, PPF and small business. Follow this with a registered will in which mention must be made of respective nominations. Registered will can be changed at any time by another registered will.