Does a nominee under a Life Insurance Policy hold the claim amount as a trustee for the legal heirs of the policy holder? - Does a nominee under a Life Insurance Policy hold the claim amount as a trustee for the legal heirs of the policy holder? - Ask the Expert - Fee Only Investment Advisers

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Does a nominee under a Life Insurance Policy hold the claim amount as a trustee for the legal heirs of the policy holder?

My friend Mr Ajay died recently ( April 2021). He had a life insurance policy for Rs. 100 lakhs. His wife Madhu was the nominee in the policy document. Ajay is survived by his wife Madhu and their 2 adult Children. Ajay had not made a will.

The Life Insurance company has paid the Insurance claim amount of Rs. 100 lakhs  to Madhu as she was the nominee under the policy.  Her elder son has recently sent her a legal notice claiming that she holds the claim amount only as a trustee for the Ajay’s legal heirs which includes him ( Ajay’s son). what is the correct position

The contention of Ajay’s son appears to be incorrect and based on earlier law. The Life Insurance Act , 1938 was amended in 2015. It has completely changed the situation where the nominee under a Life Insurance policy is the spouse, parent or child of the policy holder and the policy holder has died without leaving a will.
Please read section 39 (7) of the Insurance Act 1938. There is no grey area left in the matter as long as the nominee is the parent, spouse or child of the policy holder and there is no will.

The relevant section 39 (7) reads  :

Quote
(7) Subject to the other provisions of this section, where the holder of a policy of insurance on his own life nominates his parents, or his spouse, or his children, or his spouse and children, or any of them, the nominee or nominees shall be beneficially entitled to the amount payable by the insurer to him or them under sub-section (6) unless it is proved that the holder of the policy, having regard to the nature of his title to the policy, could not have conferred any such beneficial title on the nominee.

Thus the amendment in 2015 makes nominee  “beneficially entitled to the amount” if the nominee is from the specified category. This sub-section 7 did not exist before the 2015 amendment.
If any doubt about this interpretation exists then the newly introduced sub section (8) should remove it. It provides as under :
Quote
(8) Subject as aforesaid, where the nominee, or if there are more nominees than one, a nominee or nominees, to whom sub-section (7) applies, die after the person whose life is insured but before the amount secured by the policy is paid, the amount secured by the policy, or so much of the amount secured by the policy as represents the share of the nominee or nominees so dying (as the case may be), shall be payable to the heirs or legal representatives of the nominee or nominees or the holder of a succession certificate, as the case may be, and they shall be beneficially entitled to such amount.
Unquote

Thus makes it very clear that not only is the nominee ” beneficially entitled ” to the claim amunt but should the nominee also die between the time of death of the policy holder and before the claim amount is actually  received, then it will be the legal heirs of the nominee who will be entitled to the Insurance claim amount and not the legal heirs of the policy holder .
This this issue is absolutely clear. In the case cited by you ( wife is the nominee and there is no will) the life Insurance policy claim amount will belong to the wife absolutely without her being accountable to her 2 adult sons in any manner