Can you nominate a minor for insurance or mutual funds? Here's what you need to know

When you invest in a mutual fund or purchase an insurance policy, one of the first things you are asked to do is nominate a person who can claim or receive the proceeds in the event of your death. The nominee plays an important role in facilitating the transfer of the policy benefits or investment proceeds to the intended beneficiary, subject to applicable rules.

Some people may want to nominate their young child, particularly when they intend to secure their financial future. However, many don't understand that being named as a nominee does not necessarily determine who ultimately inherits the assets. A nominee only acts as a custodian of one's assets after their death, while the ultimate distribution is governed by the deceased’s will or, in the absence of a will, the applicable succession laws.

Can minors be named as a nominee?

Yes, there is no minimum age restriction for naming a nominee for a insurance policy, mutual funds, fixed deposits, or even the Employees Provident Fund (EPF), so a minor nominee can be appointed.

In some cases, where the investors do not wish to appoint a nominee, they can formally opt out by submitting the prescribed declaration. This can be done by logging in to your broker, bank, or mutual fund platform account.

The minor won't receive the assets

Parents sometimes name a young child as a nominee without considering who will receive and manage the assets until the child becomes an adult. When a minor is nominated, the applicable rules require a guardian or another designated person to receive the proceeds on the minor's behalf.

The guardian will receive and safeguard the payout until the minor turns 18, at which point the funds must be transferred to the minor.

This is particularly relevant in the case of life insurance. Under the Insurance Act, a policyholder can nominate a minor and appoint a person to receive the policy money on the minor’s behalf while the nominee is a minor.

Choosing a trustworthy guardian and keeping nominee details up to date after significant life events ensures that your family does not deal with disputes later. The process of registering an appointee (guardian) may vary depending on the financial asset, such as a mutual fund, insurance policy or FD.

However, the documentation generally requires details of the minor and the appointed guardian, along with the guardian’s KYC documents and proof of their relationship with the minor.

What happens if the guardian dies before the nominee turns 18?

If the guardian of a life insurance policy or other financial assets passes away before the nominee turns 18, the situation becomes complex, especially if the account holder fails to make the necessary updates.

Many financial assets, such as an insurance policy, allow for the designation of an alternate guardian or trustee who will take over the responsibilities if the original guardian cannot fulfil them. If this is the case, the alternate individual would manage the proceeds until the nominee becomes an adult.

If no alternate guardian is chosen, the court may appoint a new guardian or trustee to manage the funds. This process can vary by state and could lead to delays in accessing the funds, according to a report by Digit Insurance.