Who gets the insurance payout—nominee or legal heirs?

This dilemma stems from the intersection of insurance laws and succession laws, creating a legal gray area.

The Insurance Laws (Amendment) Act, 2015, introduced the concept of a “beneficial nominee,” granting immediate family members—spouse, children, or parents—full rights to the policy proceeds. However, succession laws treat a nominee as merely a custodian, requiring them to distribute the payout among all legal heirs.

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Conflicting court rulings have only deepened the uncertainty.

“Prior to the 2015 amendment, a nominee was only a custodian of the proceeds, and legal heirs could claim the money. The amendment clarified that ‘beneficial nominees’ will have full right to the amount,” said Sameer Yogishwar, chief operating officer, HDFC Life.

Yogishwar added that if a beneficial nominee passes away after the insured but before the claim is disbursed, their legal heirs or the holders of their succession certificate become entitled to the payout.

While the amendment was intended to simplify claims, its interpretation remains contested.

The Karnataka High Court recently ruled that insurance policy nominations cannot override legal heirs’ rights under succession laws. This means that if legal heirs assert their claim, a nominee cannot demand the full benefit solely based on the nomination.

However, two other high courts—Andhra Pradesh and Rajasthan—have taken a different stance, upholding the absolute rights of beneficial nominees. The conflicting views have left policyholders and beneficiaries in a state of uncertainty.

Mint spoke to experts to decode the legal complexities.

The Karnataka high court judgment

Late Ravi Somanakatti had named his mother as the nominee in two of his life insurance policies, which had a combined coverage of ₹21 lakh. However, after getting married and having a son, he never updated his nomination. Following his death, his widow and minor son filed a suit against his mother, claiming a share in the insurance proceeds.

The trial court ruled that the benefits should be divided equally among the wife, son, and mother, despite the nomination. Somanakatti’s mother appealed to the Karnataka high court, citing Section 39 of the Insurance Act, 1938, as amended by the Insurance Laws (Amendment) Act, 2015.

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However, the court referred to the 1984 Supreme Court ruling in Sarbati Devi vs Usha Devi and similar cases, concluding that nominations do not override succession laws. “The usual mode of succession is not to be impacted by such a nomination. Legal heirs, therefore, have not been excluded by nomination,” the Karnataka high court stated in its judgement.

The court also noted that the 2015 amendment did not explicitly state that it supersedes succession laws. “Under Section 39(7), there is no such obligation as long as there is no claim by legal heirs. In the absence of any claim by legal heirs, the title vests in the beneficial nominee,” the judgment added.

Experts weigh in

Tanmay Patnaik, partner, Private Client Practice at Trilegal, explained that the court ruled against treating a nominee as having testamentary rights over assets.

“You are providing an individual (read nominee) a testamentary right over assets as happens when creating a will. Executing a nominee form is not akin to it. The court also acknowledged that the Rajasthan and Andhra Pradesh high courts’ judgments, which gave effect to the plain meaning of the text of the amended act, could no longer be followed in light of subsequent judicial precedent,” Patnaik said.

Rajat Dutta, founder & initiator, Inheritance Needs Services, echoed this view. “The Karnataka high court judgement by justice Anant Ramnath Hegde has put all speculations to rest and paved the way to recognise the testamentary and non-testamentary inheritance by giving due importance to applicable succession laws,” he said.

Testamentary inheritance occurs when a person leaves a will or trust deed specifying how their assets should be distributed. Non-testamentary inheritance follows applicable succession laws when no will exists.

Succession laws, however, do not apply if a policy is purchased under the Married Women’s Property Act, 1874. In such cases, only the policyholder’s wife and children have absolute rights to the death benefit, shielding it from other claims.

How life insurance claims are processed

The 2015 amendment to Section 39 of the Insurance Act was introduced to simplify the process of claim payments. However, it never explicitly stated that it overrides succession laws, said Dutta of Founder & Initiator.

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When a nomination is in place, insurers directly transfer the proceeds to the nominee without verifying legal heirs. “The nominee only holds the money in trust with other legal heirs being entitled to a share. In case of conflicting claims, unless a court grants a stay, the money can be paid to a nominee. Under Section 37 of the Insurance Act, the insurer can also deposit the money into court, in case of legal disputes,” said Anil PM, head of Legal, Compliance, and Fraud Prevention Unit at Bajaj Allianz Life Insurance.

A policyholder can add multiple nominees, specifying each nominee’s share of the total insurance proceeds. “Some insurers ask for all KYC documents of the nominees in the first stage itself, while others may only ask you to mention the name and contact details such as mobile number and email IDs,” said Anil PM.

At the time of the claim, the nominee must simply prove their identity and provide bank details. “If a nomination is there, we just have to establish the identity of the nominee (through KYC) and get his/her bank account details. No-objection certificate from legal heirs is not required,” said Anil PM.

Can you make a non-blood relation a nominee? “Usually, it is not permitted due to a moral hazard. Some insurers may allow it if insurable interest can be established, but only blood relations are normally permitted in nominations in most cases,” said Anil PM.

The way forward

Before the 2015 amendment, the Law Commission of India had recommended that Parliament distinguish between a “collector nominee” and a “beneficial nominee” under Section 39 of the Insurance Act.

The Karnataka high court echoed this suggestion, stating that policyholders should have the option to explicitly declare whether a nominee is meant to hold the payout on behalf of legal heirs (collector nominee) or retain full ownership of the proceeds (beneficial nominee). The court also advised insurers to incorporate provisions for such a distinction.

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Until such clarity is established, policyholders must choose their nominees carefully. If they have a will, it should be aligned with the nominations in their insurance policies to avoid legal disputes. Nominations can be updated at any time during the policy period, and the process is simple—changes can be made online or by visiting the insurer’s branch office.