Siblings could be insurance nominees, too

Other than yourself in whose name can you buy an insurance policy? Similarly, whom can you nominate in your insurance policy? While spouse, children and parents are commonly allowed, in some cases insurance companies may allow siblings or cousins, after some amount of due diligence. This is based on the concept of insurance interest. It means that there must some financial connection between the person buying the insurance policy and in the person in whose name the policy is being bought, or whom is being nominated in the policy. Let us understand this in detail.

What is insurable interest?

The existence of insurable interest is an essential part of every insurance contract and is considered as the legal prerequisite for getting insurance. In life insurance, underwriters will check the presence of insurable interest at the time of policy issuance.

Life insurance is purchased to provide financial support to one's family to ensure their life goals remain on track and not affected in case of the policyholder's death. Similarly, health insurance is purchased to ensure financial support to the policyholder and family members.

“Insurable interest in both these cases is the relationship a policyholder has that can be defined as a blood relation or a marriage or for monetary interest,'' says Kayzad Hiramanek, executive vice-president -customer service and operations, Bajaj Allianz Life Insurance.

You can buy a life insurance policy on someone else's life, provided you have an interest in that person remaining alive, or expect an emotional or financial loss from that person's death. This is the condition the life insurance company will look for, that is, if you have a true relationship with the person you have insured and whether there will be an emotional loss or a financial loss in case that person dies.

“For example, if I am buying a policy for myself and I have dependents. So I have an insurable interest that if I am not around then the family needs the money, which I am providing for the time when I may not be alive,” says Mohit Rochlani, director, IT and operations, India First Life Insurance.

In whose name can you buy/whom can you nominate?

Insurable interest is often related to ownership, relationship by law or blood and possession of the asset. According to Mahavir Chopra, director - health, life & strategic initiatives, Coverfox.com, “A person can take a life insurance or health insurance policy on his own life, his spouse, his children, his parents as he has an insurable interest in the continuing well-being and also stands to face a financial loss in the case of death or if they fall ill. But a person cannot take a life insurance policy in the name of his friend or neighbour as there is no insurable interest present.”

Employers can buy insurance in the names of their employees. For instance, the employee could be a critical person in the organisation, say the CEO, and his or her death would have an impact on the organisation. Or banks or non-banking financial companies who are lending money to borrowers, also have an insurable interest, says Rochlani.

The nomination depends upon the type of insurance and the person nominating. Most common nominations in life insurance are for the spouse, children and parents. However, in case of parents, you will need to demonstrate that you are financially impacted if they die, says Kapil Mehta, co-founder, Securenow Insurance Brokers.

“In health insurance one can nominate a broader set than life insurance. For example, in health insurance you may buy a policy for a staff member at home because the responsibility of their healthcare is implicitly yours. In the case of property insurances, the owner of the property should buy the insurance. So landowners for the structure and tenants for content,'' he explains.

If you want to insure siblings, the insurance company may ask for the reason. For instance, it may be allowed if the individual is not married and parents are old. Or if the older brother is working and the younger brother is not working and dependent on the older brother. “If it can be logically proven that there is a dependency and there is an insurable interest of the elder sibling for the younger siblings, then those scenarios after looking at the details the insurance company may offer the cover,'' says Rochlani.

Though live-in relationships and same sex relationships are on the rise, and are not considered illegal in the eyes of law today, the partner will not get the proceeds from the policy in the event of the insured's death. It is difficult to establish a legal relationship in this case, as these concepts were not accepted by law earlier, points out Mehta.

What insurers will check

According to Jayesh Gadekar, head, health and benefits, innovative solutions at Global Insurance Brokers, insurers will check the relationship of the person buying the policy and in whose name the policy is being bought or the nominee for insurable interest. The insurance may reject the beneficiary of the policy if there is misleading information – material facts, intention of committing a fraud and no insurable interest.

“There were also instances where policyholders nominated their brothers or sisters, other family relatives and friends as nominees under their life insurance policies. This made the task of proving the existence of 'insurable interest' very difficult and increased the chances of moral hazard from appointing such a nominee. This led to the insurance company refusing the nomination or asking for further explanations. There were also cases of legal battles between the insured's legal heirs and nominees who received the policy benefits. Since, as per the previous definition, the nominee was just a receiver of the life insurance benefit and not the actual beneficiaries,'' says Chopra.

In order to provide relief to policyholders and family members against such nuisances, Insurance and Regulatory Development Authority of India (Irdai) amended the Insurance Act 2015 and created a category called Beneficial Nominee. Now, all blood relatives, that is, parents, spouse and children immediately become the Beneficial Nominee on being nominated for all new and existing policies issued before the implementation of these new amendments, he adds. This means that whoever is nominated in the policy, will get the proceeds and not others even if they are legal heirs.