Beneficiary

When you buy an insurance policy, you are not only protecting yourself. In many cases, you are also making sure that your family or someone you choose receives financial support if something happens to you. This is where a beneficiary comes in.

What is a beneficiary?

A beneficiary is the person or entity designated to receive money or other benefits from an insurance policy when the benefit becomes payable. The beneficiary does not necessarily have to be the person who purchased the policy. The person who buys the policy is called the policyholder. The person whose life or health is covered by the policy is the insured.

A simple example

Suppose Rahul got  a group term life insurance policy through his company:

• Policyholder: Company
• Insured: Rahul
• Beneficiary/nominee designation: His spouse, depending on the policy structure and applicable law
• Policy benefit: Payable according to the policy terms when a covered event occurs

If Rahul dies while the policy is active, the insurer processes the claim and pays the applicable policy proceeds in accordance with the policy terms and applicable law.

Beneficiary meaning in insurance

The beneficiary meaning in insurance is fairly simple: it refers to the person or entity designated to receive insurance benefits or policy proceeds when they become payable. The exact rights of a beneficiary can depend on the type of insurance, the policy wording, and the applicable law.

Beneficiaries are particularly important in group term life insurance, where the policy is designed to provide financial support to the policyholder's family or other chosen recipients after the insured person's death.For other types of insurance, such as group health insurance, the structure can be different. A group health insurance policy generally pays eligible medical expenses or provides benefits to the insured person rather than paying a death benefit to a beneficiary.

Who is a beneficiary in insurance?

A beneficiary can generally be a person or entity that the policyholder is permitted to designate under the applicable policy and law.

Depending on the policy, this could include:

• Spouse
• Children
• Parents
• Other family members
• Another individual permitted under the policy
• An organization or entity, where permitted

Beneficiary in life insurance

The term beneficiary in group term life insurance is especially important because life insurance is intended to provide financial protection after the death of the insured person. When a life insurance policy is purchased, the policyholder typically provides details of the person or persons who should receive the policy proceeds when a covered death occurs.

For example, Priya has a ₹1 crore life insurance policy and designates her spouse as the recipient of the policy proceeds. If Priya dies during the policy term and the claim is payable, the insurer processes the claim and pays the applicable amount according to the policy terms and applicable law. The beneficiary may need to submit documents as part of the claim process. These can include the claim form, policy details, proof of death and identity or other documents requested by the insurer.

Why is the beneficiary important in life insurance?

Group term Life insurance often comes with a specific financial goal in mind such as protecting a family from loss of income, supporting children's education, or covering outstanding financial obligations. Designating the intended recipient helps communicate who the policyholder wants the insurer to deal with when the benefit becomes payable. A beneficiary or nominee designation should not be treated as a substitute for understanding succession laws or the legal ownership of the policy proceeds. The legal position can depend on the circumstances and the type of policy.

Types of beneficiaries

The terminology used for beneficiaries can vary between financial products and jurisdictions. In policies where these distinctions apply, you may come across the following terms.

1. Primary beneficiary

A primary beneficiary is the person or entity designated to receive the policy proceeds when the insured event occurs, subject to the policy terms and applicable law. For example, if a person names their spouse as the primary beneficiary of a life insurance policy, the spouse is the first designated recipient of the policy proceeds.

2. Contingent or secondary beneficiary

A contingent beneficiary is someone designated to receive the benefit if the primary beneficiary cannot receive it, where the policy permits such a designation. For example, a person may designate their spouse as the primary beneficiary and their child as the contingent beneficiary. 

3. Multiple beneficiaries

A policyholder may sometimes designate more than one beneficiary. For example, a person may want the policy proceeds to be distributed among their spouse and children. The policy may allow the policyholder to specify the relevant shares or percentages. If you have multiple beneficiaries, it is important to check that the designation is clearly recorded with the insurer.

4. Minor beneficiary

A minor beneficiary is a person below the applicable age of majority who has been designated to receive insurance benefits. If a minor is named, the insurer may require details of an appointee, guardian or other legally recognised person to handle the claim or receive the amount on the minor's behalf, depending on the circumstances and applicable law. Anyone considering naming a child as a beneficiary should understand the process applicable to the particular policy.

Beneficiary vs nominee: What is the difference?

Beneficiary and nominee are sometimes used interchangeably in everyday conversations about insurance. However, they are not necessarily the same thing from a legal perspective.

A nominee is a person designated under the relevant insurance policy or financial product to receive or deal with the policy proceeds, depending on the applicable law and policy structure.

A beneficiary generally refers to the person or entity intended to receive the benefit.

In India, the legal position can vary depending on the type of policy and the circumstances. In some cases, a nominee may receive the amount from the insurer but that does not automatically mean the nominee is the ultimate beneficial owner of the money.

How to add or change a beneficiary

Group Insurance policies can remain active for many years. During that time, a person's circumstances can change considerably. You may get married, have children, go through a divorce, or experience the death of someone previously designated. That is why it is worth reviewing beneficiary or nominee information periodically.

The exact process for making a change depends on the insurer and policy.

Generally, the process may involve:

1. Checking your policy documents
   Look at the current beneficiary or nominee details recorded with the insurer.
2. Contacting the insurer
   Ask the insurer how to update the designation.
3. Providing the required information
   You may need to provide the person's name, relationship, contact details and other information requested by the insurer.
4. Completing the required form or online process
   Some insurers allow changes through their online customer portals, while others may require a specific form.
5. Confirming the update
   Keep a record or acknowledgement showing that the change has been accepted and recorded.

When should you update beneficiary details?

Common situations include:

• Marriage
• Divorce
• Birth or adoption of a child
• Death of a previously designated person
• Change in family circumstances
• Changes to your financial planning
• Changes in your estate or succession planning

Can you have more than one beneficiary?

In policies that permit multiple beneficiaries, yes, a policyholder can designate more than one person.

For example, a policyholder could designate:

• Spouse – 50%
• Child 1 – 25%
• Child 2 – 25%

The actual options and legal effect depend on the policy and applicable law. If multiple beneficiaries are allowed, make sure the details and shares are clearly recorded. Ambiguous or outdated information can create complications when a claim is filed.

What happens if there is no beneficiary?

If no beneficiary or nominee has been designated, the claim does not necessarily become invalid. The insurer will generally follow the applicable claim and legal process for determining who is entitled to receive the policy proceeds. Depending on the circumstances, the insurer may ask for documents establishing the claimant's entitlement.These could include documents related to legal heirship, succession, court orders or other evidence, depending on the situation. This can make the claim process more complicated than it would otherwise be. That is one reason policyholders should not simply buy a policy and forget about the beneficiary or nominee details.

Make Employee Benefits Easier to Manage

Managing group insurance involves more than choosing the right coverage. From adding employees and dependents to keeping nominee details updated and supporting employees during claims, HR teams have a lot to manage.

With Pazcare, companies can manage group health insurance and benefits from one platform, while employees get easier access to their healthcare benefits and support when they need it.

Explore Pazcare’s employee benefits platform and make insurance simpler for your HR team and employees.