There are two broad motives behind investing & taking life insurance – firstly enjoy the proceeds of investments while one is alive
and secondly to leave your dependants a financial gift which would keep them going to meet their expenses and allow them to maintain a healthy standard of living. A person gets so much busy in earning, enjoying and investing that in some cases he/she forgets one of the important thing to do – Nomination of Investment. Another related topic is creating a Will which though shall be covered slightly by this blog, would be covered in detail by another seperate blog.
What is a Nomination ?
There is a broad misconception that Nomination involves transferring the rights to an asset post death to the nominee. Nomination just allows the nominee to take the possession of the asset / funds and the nominee is entrusted with the responsibility to hold the funds as a trustee on behalf of the legal hiers. Legal hiers are either mentioned in the Will or in the absence of a Will, decided by law of succession. So you can already understand that though Nomination is important, Will actually specifies that who shall be the final owner of the asset post death of the asset owner.
Then Why is Nomination Important ?
A very good question ! It is correct that the Will would tell who would be entitled to the funds post death of account holder. However, it takes a lot of legal formalities for a legal hier to obtain the ownership of funds / assets after the death of the owner. In many cases, the Will does not exist and it bring in years of costly court procedures to obtain the succession certificate. A family which would already be torn apart due to a loss of a near and dear one would not want to be involved in these hassles. Further, in order to take the possession of the funds it takes quite a lot of time (often in several months to several years) and in the mean time the family member of the deceased is left with limited or no financial backing to support their life.
If you have a nomination in all your financial accounts such as bank, mutual funds, demat, etc., the respective bank, fund house or company would easily hand over the proceeds to the nominee upon submission of the required documents such as proof of death of the owner, proof of ID of nominee, etc. This would entail that atleast the corporates are out of the picture who would be possessing the funds of the deceased relative and now the funds will be in the hands of the nominee whom the deceased person had nominated at the time of investing his / her funds. Now it is upto the nominee and legal hiers to decide how to split the funds – which is much easier than fighting with the corporates to release the funds. Other than in complex cases, most of the times the nominees are same as legal hiers.
How to do a Nomination ?
Doing a nomination is a very simple process. Every bank, mutual fund, post office, etc. have a prescribed form which you obtain. You would need to specify your nominee details and make sure that the name and relationship is clearly noted in the form. Once these details are filled, sign the form and submit it with the respective company. Simple isn’t it – and hence the most neglected part in any investment process.
Which investment classes accept nominations ?
Ideally all investment assets have an element of accepting nomination. A couple of examples of such assets are bank account (saving, fixed and recurring deposits), PPF, PF, Mutual funds, demat account, post office saving accounts, insurance policy etc. Infact the importance of doing nomination is enhanced by the recent regulatory requirement which makes is mandatory for a person investing into mutual funds to mention their nominee details. This promotes smooth settling of claims in case of death of the account holder.
Nomination versus Will
As mentioned in earlier paragraphs, Will is the sole document which mentions who will be the legal hiers of the assets of a deceased person. Nomination only mentions who would be holding the assets of a deceased person as a trustee. In the following cases, the relationship between Will vs Nomination will become more clear :
1. Insurance policy : As per the Insurance Act, while the nominee shall be paid, but the nominee may not be the legal hier to the funds. Nominee is supposed to hold the funds on behalf of the legal hiers who would be mentioned in the will or determined by the rules of succession.
2. Mutual Funds : You can nominate upto 3 nominees in a mutual fund and specify the percentage nomination interest for each of the nominee in the fund. It is important to note that the nomination in mutual funds is at the folio level. Hence you may have several funds within a specific folio and all the funds would have the same nomination as at the folio level. If you want to have a seperate nomination, you must open a different folio with the new nominee details. However, again as mentioned in 1 above, the Will would prevail over the nominations mentioned in the Mutual Funds.
3. Nomination of shares : Unlike the above paragraphs, nomination in case of shares / demat account over ride in case there is no will. In a legal verdict it has been proven that the section of Company Act and the Depository act are abundantly clear that nomination vests the owership rights of the shares onto the nominee. However, if there is a Will, the contents of the Will shall prevail over nomination.
4. PPF : This is the most important section as most of the Indians like saving in PPF. If you haven’t given a nomination in PPF, your legal hiers can only claim upto Rs. 1 lac from the PPF.
Procedure for Nominee to claim after death of account holder
If a nominee is registered in an account, the procedure to claim the funds is very simple and generally remains the same across different financial institution. Broadly the following set of documents would require the following set of documents before transferring the funds in the name of the nominee:
- ID proof & address proof nominee;
- Original copy of the death certificate;
- Declaration of Indeminity against the respective company in regards to any claims; and
- Any other additional document as required by the respective financial institution.
You can contact the author Banyan Financial Advisors at www.banyanfa.com
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