Life insurance policy is a financial tool availed in order to protect the income of dependents of life insured in case of his untimely demise. The policy pays off the dependents, a certain portion of money at maturity or at the time of demise of life insured.
We have discussed about the types of life insurance policy in details here: 4 types of life insurance policies offered in India
There is a possibility that the life insured had some outstanding borrowings or debts either from banks or from creditors in case of a businessman. These are to be repaid even when the person is not alive. In general parlance, banks & creditors have the right to the property of life insured to recover their dues.
As we have discussed earlier in our series, term life insurance should cover three basic things:
- Passive income to provide for the basic needs of family.
- Provide for the unfinished goals: Child education corpus, child marriage corpus etc.
- Provide for the outstanding liabilities: Home loans, car loan etc.
The question that arises now is, what if a person is unable to get the adequate cover due to some reasons and is thus exposed to the risk of the cover being wiped out in payment of outside liabilities leaving nothing for the basic needs of family?
Under section 6 of Married Women's Property Act, 1874 also known as MWP. The act provides for security of the benefits to be received under a life insurance policy to the wife & children. It also provides for creation of a Trust.
Beneficiaries of section 6 of Married Women's Property Act, 1874 can be:
- Only wife
- Wife & children jointly
- Only children
The act lays down that the policy of life insurance taken by a married man on his own life for the benefits of his wife, or his children or for both shall be deemed to be a trust for his wife, or his children or for both. i.e. It would be solely for the benefit of the person mentioned on the face of policy as the trustee. The policy so marked specifically for the above mentioned people shall not be subject to control of husband (life insured himself) or his creditors or his bankers as a part of his estate.
Such policy can never be claimed by the lenders or creditors even the life insured himself in case of maturity as it is solely taken for the benefits of his wife, or his children or for both.
There are few things to be kept in mind while taking a life insurance policy under Married Women's Property Act, 1874.:
- Term life insurance policy can be taken under Married Women's Property Act.
- You have to declare to your insurance advisor that you are planning to buy the life insurance policy under this act as it has to be done only at the time of filing the proposal form. Keep in mind that you cannot convert a normal life insurance policy to Married Women's Property Act later on. You have to do declare it in the proposal form itself to avail this benefit.
- A life insurance policy marked under Married Women's Property Act cannot be converted to a normal policy under any circumstances. This policy can never be surrendered and neither nomination nor assignment of such life insurance policy is allowed whatsoever.
- Policyholders need to fill up and sign an MWPA addendum along with the insurance application at the time of taking the policy.
- The policy shall always be beyond the control of attachment from courts, creditors, lenders or even the life assured.
- The beneficiaries of the life insurance policy taken under Married Women's Property Act cannot be amended in any way. Once a policy is taken in the name of a trustee, then it becomes an irrevocable & non-amendable deed.
- A policy under Married Women's Property Act can only be taken on the life of a married man for benefits of his wife or kids. A married woman cannot take a policy under this act for benefits of her husband & kids.
- In case of divorce, the wife will still continue to remain the beneficiary of the policy as the beneficiary cannot be changed. Even in case of re-marriage but husband, the ex-wife will be the beneficiary & not the new wife.
As you are aware that declaration of MWP Act for policy has to be given while buying it. It happens many a times that the insurance advisor (online or offline) does not guides you about this as it involves some manual & paper based process. This makes things a bit lengthy and hence is not appreciated by advisors.
This happens mostly in case of online platforms where everything is supposed to hands-off and easy. It is always suggested to check with the advisor as to whether he has declared it under MWP Act and has taken your signatures on MWPA addendum.
Also once you receive the policy document, you should cross check that the beneficiaries are clearly mentioned or not. There is always a free look period of 15 days where you can surrender the policy and get your money back in case you are not satisfied with the product.
CA Rohit J. Gyanchandani is Managing Director, Nandi Nivesh Private Limited, A Pune based Wealth Management Company.