Nominee vs legal heir

What is the difference between a nominee and a legal heir?

A nominee is the person the policyholder names to receive the policy money from the insurer on death. A legal heir is a person entitled to the deceased's property under succession law, either through a valid will or, if there is none, under the personal law that applies (for example the Hindu Succession Act, 1956 or the Indian Succession Act, 1925). Often they are the same person. When they are not, the question is whether the nominee only collects the money or actually owns it. In Indian life insurance, the answer depends mainly on who the nominee is.

How the nominee and legal heir rules work in India

Before 2015: the nominee as collector. For decades the settled position, set out by the Supreme Court in Sarbati Devi v. Usha Devi (1984), was that a nominee under Section 39 of the Insurance Act was only a person authorised to receive the money. The insurer got a valid discharge by paying the nominee, but the money belonged to the estate and passed to the legal heirs.

After 2015: beneficial nominees. The Insurance Laws (Amendment) Act, 2015 rewrote Section 39 with effect from 26 December 2014. Under Section 39(7), if a person insured on their own life nominates their parents, spouse, children, or spouse and children, or any of them, those nominees are beneficially entitled to the amount. This applies to all life policies maturing for payment after the 2015 amendment. The exception is where it is proved that the policyholder, given the nature of their title to the policy, could not have conferred such a benefit.

Other nominees. A sibling, nephew, friend or business partner named as nominee is not a beneficial nominee under Section 39(7). The insurer pays them, but under the earlier case law they hold the money for the legal heirs.

Creditors. Section 39(9) says nothing in the beneficial nominee provisions defeats a creditor's right to be paid from the policy proceeds.

MWP Act policies. A policy written under Section 6 of the Married Women's Property Act, 1874 creates a trust for the wife and children. Section 39 does not apply to it, and neither the husband's other heirs nor his creditors can claim the money.

Outside insurance. In Shakti Yezdani v. Jayanand Jayant Salgaonkar (December 2023), the Supreme Court held that a nomination for company shares and similar securities does not make the nominee the owner, and is not an alternative mode of succession. That case was about securities, not insurance, but it shows why the express wording of Section 39(7) matters for life policies.

Example. Ravi, unmarried, names his younger brother as nominee and dies without a will, leaving his mother as his only Class I heir under the Hindu Succession Act. The insurer pays the brother. Because a brother is not a beneficial nominee, the mother can claim the money from him as the legal heir. Had Ravi named his mother, she would have received and owned it directly.

What nominee vs legal heir means for distribution

• Ask "who should own this money?", not just "who should receive it?". The answer decides whether a family member should be the nominee, or whether the customer also needs a will or an MWP policy.
• Explain the beneficial nominee list. Many customers name a sibling for convenience. If they mean that sibling to keep the money, a will is needed. If they mean the money to reach a parent or child, name that person.
• Point customers with debts, business liabilities or family disputes to the MWP route. An MWP policy is the cleanest way to keep proceeds away from creditors and other claimants.
• Keep the nominee updated after marriage and children. A pre-marriage nomination of parents is common and is often left unchanged, which can surprise a widow at claim time.
• Do not give legal advice. A distributor should explain how nomination works under the Act and suggest professional advice on wills and succession where the family situation is complex.