September 17, 2019

How to protect insurance claims from creditors?

Dhirendra Mahyavanshi

Founder, Turtlemint

How to protect insurance claims from creditors? 

For the longest time, our society has put the onus of being the primary bread winner for the family on men. Even with the rising women workforce where women are building a career for themselves, men are still considered to be the financial anchor for a lot of families for various reasons. Hence comes the importance of life insurance policies wherein it acts as a Plan B for the family’s financial future.

That is what motivates a lot of men to often invest in life insurance policies so that in case of their premature death the policy benefit would provide financial support to their family. But is this financial support guaranteed? What if there are creditors waiting to get their accounts settled? Can the husband ensure that the policy benefits would be used by his wife and/or children only?

Though it is a bitter pill to swallow, the truth is that the proceeds of a life insurance policy can be claimed by creditors who are owed money. In fact, the proceeds can be claimed by any individual who can prove a legal right of ownership of the money.

If that happens, the wife and/or kids would not get the benefit and the whole purpose for which the husband had bought the policy would be wasted. How can you prevent it?

There is a Married Women’s Property clause under life insurance policies which, if selected, would ensure that the proceeds from a life insurance policy would go to the wife and/or child ONLY and cannot be attached for any other purpose.

Let’s understand what the clause is all about –

The Married Women’s Property (MWP) Act, 1874

The Married Women’s Property Act was passed in the year 1874 with a view to safeguard the rights of married women and children. Section 6 of the Act states that if a married man buys a life insurance policy on his life and wants the policy’s benefits to be utilised by his wife and/or children, the policy would be considered a trust. The policy cannot be controlled by the man himself, his creditors, court attachments or anyone. The policy shall be deemed to benefit only his wife and/or children.

As per the rulings of the Act, if yourclient chooses the MWP clause in the life insurance policy that he opts for, the policy benefits would be earmarked for his wife and/or children.

Must-know facts about MWP in life insurance policies:

Here are some things which you should know about MWP in the context of life insurance policies –

1. The beneficiary of the policy can be any of the following –

• Only the wife
• Only the children
• The wife and children jointly. In this case, the husband can specify the percentage of benefit which should be paid to each beneficiary. He can also specify the benefit to be paid jointly to all or to the survivors.

2. Nomination is not required in a policy which has a MWP clause. In case of death, the policy benefit is paid to the trustee who acts as a custodian of the money for the beneficiaries (if the trustee and beneficiary are different).

3. Divorced or widowed men can also opt for this clause. In such cases, the beneficiary would be the children.
4. In case of Hindu men, adopted children can also be made beneficiaries.
5. In case of Muslims, the beneficiaries are called ‘Persona Designata’. The beneficiaries are required to be named when the policy is being bought. Moreover, the beneficiaries should exist at the time the policy is being bought. If there are two or more beneficiaries, the share of each beneficiary should be expressly stated.
6. The policy should be bought by a married man on his own life.
7. Every policy is treated as a separate trust and it should have a trustee. The wife of the individual or his child, who should be more than 18 years old, should be appointed as a trustee.
8. Multiple trustees can also be appointed.
9. The consent of the trustee to act as such is required. This consent should be attached to the life insurance policy document.
10. If no trustee is appointed, a competent Government Authority would appoint Official Trustees.
11. The trustee, once appointed, can be changed any time during the term of the policy.
12. The life insurance policy under which the MWP clause has been chosen cannot be surrendered before the completion of the tenure. The husband cannot even assign the policy to someone else’s name.
13. The MWP clause can be chosen ONLY at the time of buying the policy and not later.

Most Important Benefit of MWP policies:

By choosing MWP clause in a life insurance policy, a married man can ensure the policy proceeds to reach his wife and/or children for their financial needs. The policy, therefore, becomes a financial cushion for the man’s family. Moreover, no additional charge is levied when the MWP clause is chosen. It is a simple addition to the policy’s terms and conditions which ensures that a man’s family is taken care of even in his absence.

Most importantly MWP is an important clause that can be attached to a life insurance policy if your client has a big loan, so that in case the clientdies before the loan is repaid, the proceeds are not attached to the creditors.

So, if your clients have existing life insurance policies check whether they have selected the MWP clause or not. If not, advise them to buy a separate policy and select the clause. Over and above working hard to make sure that their family has the financial means to survive, choosing the MWP clause ensures the financial security of the family even after the death of the husband. So, understand the MWP clause and educate your clients about its benefits so that they get a better financial future.