Nominee
Also written Nominee (insurance) · Nomination
The person you name to receive custody of your money or securities when you die — a custodian who must pass the asset to the legal heirs, not the owner of it.
In plain language
A nomination is a name you write on a form so that, when you die, the bank or the depository or the mutual fund knows whom to hand the money to without waiting for a court.
What it does not do is decide who owns that money. The workbook is unusually blunt about this: a nominee is only a custodian of the asset owner's money and doesn't have any ownership rights. The nominee collects; the legal heirs inherit. Where the two are the same people, nobody notices the distinction. Where they are not, it is the whole story.
In the securities market, nomination is the facility that enables an individual investor to nominate a person, who can claim the securities held by him or her in their demat accounts, or the redemption proceeds thereof in respect of mutual fund units, in the event of death of the investor.
How it works
You name the nominee when you open the account, and you can change it later. It costs nothing.
The workbook's guidance:
- Nomination for a demat account is not mandatory, but advisable — it alleviates the problems faced by legal heirs in case of death of account holder.
- The Do's and Don'ts annexure says to avail the nomination facility for all your investments, and that multiple nominations are allowed in a demat account.
- In the absence of nomination, it could be expensive and time consuming for the legal heirs of the deceased to get their money.
Without a nomination, the heirs must approach every bank, depository, mutual fund and insurer separately, presenting a death certificate along with a legal heir's certificate. With a Will, the assets are distributed as the Will says; in the absence of a Will, transfer is made only to legal heirs under the applicable personal law.
A worked example
The workbook's example, with rupees attached. Suresh places Rs 6,00,000 in a bank fixed deposit and nominates his friend Ramesh. Suresh dies; the FD is worth Rs 6,72,000 with interest.
The bank pays Rs 6,72,000 to Ramesh, because Ramesh is the registered nominee. That is the bank discharged.
Ramesh is now holding money that is not his. He needs to subsequently transfer the entire amount to Suresh's legal heirs; otherwise his heirs will need to claim the amount in the court of Law.
Set against that, the cost of having named nobody. Suresh's widow would have had to obtain a legal heir's certificate and approach the bank, the depository, two mutual funds and the insurer one by one. In practice that is several months and, with legal fees, commonly tens of thousands of rupees — against a form that took ninety seconds at account opening.
The correct arrangement was available and free: nominate his wife, so that custody and inheritance land on the same person.
Why NISM asks about it
Chapter 7 (Pension, Retirement and Estate Planning) defines the nominee as a custodian without ownership rights and gives the Suresh-and-Ramesh example; Chapter 5 covers the nomination facility for demat accounts; Chapter 6 uses "nominee" for the recipient of a life insurance sum assured. The examinable line is custodian, not owner — and the pair of facts that nomination in a demat account is not mandatory but advisable and that multiple nominations are allowed.
Common exam traps
- Nominee is not the same as legal heir. The nominee receives custody; the heirs receive ownership. This is the single most asked point in the chapter.
- A nomination does not override a Will. The Will decides distribution; the nomination only decides who collects.
- Not mandatory for a demat account, but advisable. An option saying nomination is compulsory is wrong.
- Multiple nominations are allowed in a demat account — do not answer "only one".
- A nominee is not a power of attorney. A PoA acts while you are alive; a nomination operates only on death.
- Nominate on every account separately. A nomination on your bank account does nothing for your demat account or your mutual funds.
Check yourself
1.What rights does a nominee have?
- a)Full ownership of the money on the death of the account holder
- b)Only the right to have custody of the money — a nominee is a custodian with no ownership rights and must pass the money to the legal heirs
- c)Ownership, provided the nomination was made in writing
- d)No rights at all; the nomination is merely a formality
Show the answer
Answer: (b) Only the right to have custody of the money — a nominee is a custodian with no ownership rights and must pass the money to the legal heirs
"A NOMINEE is a person who receives the RIGHT TO HAVE CUSTODY of the money on the death of the account holder. A nominee is ONLY A CUSTODIAN of the asset owner's money and DOESN'T HAVE ANY OWNERSHIP RIGHTS." The booklet's example settles it: "Suresh invests in an FD and nominates his friend, Ramesh... On Suresh's death, Ramesh receives the money as his nominee. RAMESH NEEDS TO SUBSEQUENTLY TRANSFER THE ENTIRE AMOUNT TO SURESH'S LEGAL HEIRS; otherwise his heirs will need to claim the amount in the court of Law." So nomination answers "whom may the institution pay?", while a Will answers "who owns it?" — they are complements, not alternatives. Option (d) understates it badly: nomination matters a great deal, because "in the absence of nomination, it could be EXPENSIVE AND TIME CONSUMING for the legal heirs of the deceased to get their money", and one should "fill in the nomination details while opening ANY account."
2.Which statement describes term insurance?
- a)It pays a lump sum on maturity as well as on death
- b)Nominees receive the sum assured if the insured dies during the policy term, and the policy is active for a fixed period of time
- c)It stays active as long as premiums are paid, with no fixed term
- d)A portion of the premium is invested in equity and debt
Show the answer
Answer: (b) Nominees receive the sum assured if the insured dies during the policy term, and the policy is active for a fixed period of time
"In event of your unfortunate demise DURING THE POLICY TERM, your nominees will receive the 'SUM ASSURED' which you had selected while purchasing the plan. Active for a FIXED PERIOD OF TIME (popularly referred to as the 'term of the policy')." Nothing about maturity, nothing returned on survival — and that bareness is exactly what makes the cover so large for so small a premium, since almost the whole premium buys protection rather than being saved for you. The wrong options each describe a different product: (a) is endowment, which pays "a lump sum amount after a specific term (on the maturity of the policy) OR on death"; (c) is whole life, which "stays active as long as you pay the premiums"; and (d) is unit linked insurance, where "a portion of the premium... is utilized to provide insurance coverage... and the remaining portion invested in equity and debt instruments."
3.A man has nominated his wife on all his bank deposits and says no Will is needed. Is he right?
- a)Yes — nomination transfers ownership to the nominee
- b)No — a nominee is only a custodian with no ownership rights, so nomination decides whom the bank may pay while a Will decides who owns the assets; both are needed
- c)No — nomination is invalid unless accompanied by a Will
- d)Yes, provided the nomination is registered
Show the answer
Answer: (b) No — a nominee is only a custodian with no ownership rights, so nomination decides whom the bank may pay while a Will decides who owns the assets; both are needed
The two instruments answer different questions. Nomination answers "whom may the institution pay?" — a nominee "receives the right to have CUSTODY of the money" and is "ONLY A CUSTODIAN... and DOESN'T HAVE ANY OWNERSHIP RIGHTS." A Will answers "who owns it?" — it is "a written legal declaration of desires to distribute assets of the deceased after his or her demise." The Suresh and Ramesh example shows the gap in operation: the nominee receives the money and "needs to subsequently transfer the entire amount to Suresh's LEGAL HEIRS." Option (c) overstates in the other direction — nomination is perfectly valid on its own and highly worthwhile, since "in the absence of nomination, it could be expensive and time consuming for the legal heirs... to get their money." Do both: nomination gets the money out of the counter quickly, and the Will settles who is entitled to it. Recall also from Chapter 5 that multiple nominations are allowed in demat accounts.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Power of AttorneyA legal document by which you authorise somebody else — often your stock broker or depository participant — to operate your demat and bank account on your behalf. It is optional, and revocable.
- Estate planningDeciding during your lifetime who is to receive which of your assets after your death, and documenting it — mainly through a Will and nominations — so heirs can claim them easily and cheaply.
- Succession certificateA certificate issued by a District Court under the Indian Succession Act, 1925 authorising the legal heirs of someone who died without a Will to collect the deceased's debts and securities.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
- WillA written legal declaration of desires to distribute the assets of the deceased after his or her demise, allowing assets to be transferred according to one's preferences and avoiding feuds among beneficiaries.
- Know Your CustomerThe identity and address check every investor must clear before a bank, broker or depository participant will open an account — mandatory under the Prevention of Money Laundering Act, 2002.