Nominee vs Legal Heir in Life Insurance: Who Gets the Money

When a policyholder dies, the family often assumes the nominee simply keeps the entire payout. Indian law is more careful than that, and the difference between an ordinary nominee and a beneficial nominee decides whether the money is kept or shared.

A nominee receives the insurance money, but does not always own it. An ordinary nominee is only a trustee who must hand the proceeds to the legal heirs under succession law. A beneficial nominee under Section 39(7) of the Insurance Act 1938, meaning a spouse, child or parent, keeps the money beneficially.

Who a nominee actually is

A nominee is the person you name in the policy to receive the death benefit from the insurer. Naming a nominee gives the insurance company a valid person to pay, so the claim is settled quickly. By itself, nomination does not decide who finally owns that money. Ownership depends on whether the nominee is a beneficial nominee or an ordinary one.

For decades the rule came from the Supreme Court in Sarbati Devi v. Usha Devi, 1984 AIR 346. The Court held that a mere nomination under Section 39 of the Insurance Act 1938 does not confer on the nominee any beneficial interest in the policy money. The nominee only indicates the hand authorised to receive the amount, on payment of which the insurer is discharged. The money is then claimed by the legal heirs as per the succession law that governs the deceased, such as the Hindu Succession Act 1956 or the Indian Succession Act 1925.

This changed for close family. The Insurance Laws (Amendment) Act 2015 inserted Section 39(7) into the Insurance Act 1938. It provides that where the nominee is the parent, spouse, children, or spouse and children, or any of them, the nominee is beneficially entitled to the amount payable by the insurer, unless it is proved that, having regard to the nature of the policyholder's title, the policyholder could not have conferred such beneficial title. So a beneficial nominee keeps the money and need not divide it among other heirs.

Section 39(8) covers a related situation. If a beneficial nominee survives the policyholder but dies before the claim is paid out, that nominee's share goes to the heirs or legal representatives of the nominee.

The Madras High Court applied this in A. Devika v. Senior Branch Manager, LIC, 2025:MHC:589, holding that a validly nominated beneficial nominee under Section 39(7) was entitled to claim the entire amount. In that matter the wife, a beneficial nominee, voluntarily agreed to share one third with the deceased's mother and kept two thirds. So Section 39(7) gives a strong claim, but families can still settle by agreement.

Two practical takeaways. First, if the nominee is a friend, sibling, distant relative or anyone outside the parent, spouse, children list, the Sarbati Devi trustee rule still applies and the money belongs to the legal heirs. Second, a beneficial nomination protects the insurance proceeds specifically, not your other assets, so it is safest to pair it with a will.

How to make a beneficial nomination

  1. Open your policy document or insurer portal and find the nomination or Section 39 section.
  2. Name a nominee from the close family list of parent, spouse, child, or spouse and children, so the beneficial-nominee rule applies.
  3. State the relationship clearly, such as wife, son, daughter, mother or father, since the relationship is what triggers Section 39(7).
  4. Submit the nomination or change form to the insurer in writing and get it registered on the policy.
  5. Collect the insurer endorsement or acknowledgement that records the nomination, and keep it with the policy.
  6. Back it with a registered will if you want the same person to inherit your other assets too.
  1. Inform the insurer of the death and ask for the claim form for the relevant policy.
  2. Submit the death certificate, the original policy and the claimant identity and bank proof.
  3. If you are a beneficial nominee, claim the full amount under Section 39(7).
  4. If you are an ordinary nominee, you receive the money but must distribute it to the legal heirs as per succession law.
  5. If there is no nominee or a dispute, heirs usually need a succession certificate or legal heir certificate to receive the money.

Documents required

  • Original life insurance policy document
  • Death certificate of the policyholder issued by the municipal authority
  • Claim form of the insurer, duly filled and signed
  • Identity and address proof of the claimant
  • Cancelled cheque or bank passbook for the claimant account
  • For disputed or no-nominee cases, a succession certificate or legal heir certificate
  • Will, if the policyholder left one

Common mistakes families make

  • Assuming any nominee keeps the money. For a non-family nominee the Sarbati Devi trustee rule means the heirs own it.
  • Forgetting to update the nominee after marriage, divorce or a death in the family.
  • Naming a friend or sibling and expecting them to keep the proceeds, when under succession law they hold it for the heirs.
  • Treating a beneficial nomination as a substitute for a will. Section 39(7) covers only that insurance policy, not your house, bank balance or shares.
  • Not recording the relationship correctly, which can let the insurer or other heirs question whether Section 39(7) applies.

Dr. Shrawan Kumar Pathak of Vaishali district, Bihar, held an LIC policy of ₹25,00,000 and named his wife Kashvi Pathak as nominee, recording her relationship as wife. He died on 12 February 2026. Because a spouse is a beneficial nominee under Section 39(7), the insurer paid the full ₹25,00,000 to Kashvi, and she was not required to divide it among the other heirs. Had he instead named his brother as nominee, that brother would have received the cheque only as a trustee and the money would have belonged to the legal heirs.

Frequently asked questions

Does a nominee always keep the insurance money?

No. An ordinary nominee only receives the money and must pass it to the legal heirs. Only a beneficial nominee, meaning a spouse, child or parent, keeps it under Section 39(7).

What is a beneficial nominee?

A beneficial nominee is a parent, spouse, child, or spouse and children named in the policy. Under Section 39(7) of the Insurance Act 1938, such a nominee is beneficially entitled to keep the proceeds.

Is Sarbati Devi v. Usha Devi still good law?

Yes, for nominees who are not the parent, spouse or children. For them the 1984 ruling still applies and the nominee holds the money in trust for the legal heirs.

My brother is the nominee. Does he keep the money?

No. A brother is not in the beneficial nominee list. He receives the payout but must hand it to the legal heirs as per the succession law that governs the deceased.

What if there is no nominee at all?

The insurer pays the legal heirs. They usually have to produce a succession certificate or legal heir certificate to establish who is entitled to the money.

Can a will override a nomination?

A nomination decides who receives the policy money from the insurer. For ordinary nominees the final ownership still follows the will or succession law. A beneficial nomination is strongest when it matches your will.

What happens if the beneficial nominee dies before the claim is paid?

Under Section 39(8), if a beneficial nominee survives the policyholder but dies before the money is paid, the share goes to the heirs or legal representatives of that nominee.

How do I change my nominee?

Submit a nomination change request to your insurer in writing, get it registered on the policy and keep the endorsement. Update it after major life events like marriage or divorce.

Does a beneficial nomination protect all my assets?

No. Section 39(7) covers only that insurance policy. To pass on your house, bank deposits and other assets, make a registered will.

Often yes, where there is no valid nominee or a dispute. A succession certificate or legal heir certificate from the competent authority is commonly required by insurers.

Sources

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