Talks of a third wave of COVID-19, which experts say is imminent given the pandemic-inappropriate behavior all around, have reopened the barely-healed wounds and trauma of many families. Breadwinners, home-makers, beloved elders – the pandemic’s second wave in India spared none.
Even as COVID-19 affected families come to terms with their grief, others need to take lessons from their nightmarish experiences and be insulated at least against the financial toll that pandemic can take. For many, protecting their families financially would mean buying an adequate life insurance cover. But is that enough?
Consider this scenario: You take a large personal loan to meet some emergency needs. In addition, you have substantial monthly outgo in the form of household expenses and children’s school fees. Yet, you draw comfort from the fact that you have a Rs 1-crore term insurance cover that will come to your family’s rescue in case of your unfortunate demise.
However, your confidence could be misplaced. This is because your creditors will have the first claim over the insurance proceeds under such circumstances. You could, of course, plan well and ensure that you buy a cover that is large enough to take care of regular expenses and the family’s future goals, after paying off your loans. But this apart, you can also look to bring your life cover under the purview of the Married Women’s Property Act (MWPA) to ensure that the claim amount goes to your wife and children alone. Read on to know more about safeguarding your family’s interests under the Act’s provisions.
Foolproof protection for wife and children
In case of an individual’s death or insolvency, his assets are first used to pay off the liabilities. Only after the creditors’ dues are settled, do the family members or legal heirs get to access the balance assets from his estate. “However, due to the provisions of the MWP, rights, and interests of the family are protected. Such a policy, purchased by a married man, does not become part of his estate and, hence, cannot be used for the purpose of fulfilling his debts and liabilities,” explains Shabnam Sheikh, Partner, Khaitan, and Co. While it is most relevant for businessmen who also run the risk of becoming insolvent, it holds utility value for salaried individuals too.
Buying the policy under the MWPA leads to the creation of a trust to which the claim proceeds are transferred. “The beneficiaries of the trust are the wife and children of the policyholder. The maturity or the death benefit is transferred to the beneficiaries. The creditor will have no claim over the proceeds received from the life insurance company,” says Venky Iyer, Chief Distribution Officer, Tata-AIA Life Insurance. Buying policies under the purview of this Act also protects the interests of the policyholder’s wife and children if they live in a joint family. He need not be concerned about his wife and kids landing in financially disadvantageous situations due to disputes depriving them of their share in family assets in his absence. Irrespective of the disputes, the money from such life covers will definitely reach their accounts, ensuring financial security.
However, do bear in mind that you bring the policy under the MWP Act’s purview only if it is meant exclusively for the financial protection of wife and children. It may not be a good idea if you are ‘investing’ in unit-linked insurance policies (ULIPs) and traditional endowment plans for your retirement. “The policyholder will not have rights to the proceeds of the policy if he outlives the term, since the benefits of MWPA policy are earmarked for the beneficiaries only,” explains Iyer.
It is primarily aimed at married men who would want to ensure that only their wives and children receive the claim proceeds from their life insurance policies. You will have to specify if the policy is being taken solely for the benefit of your wife and children. While marriage is a prerequisite here, the Act also takes into account other situations such as divorce. “The existence of such marriage does not imply a current marriage… a widower and a divorcee can also buy such a policy for the benefit of their children,” says Shaikh. Another precondition is that your intention behind buying the policy should not be to cheat your lenders. “If the purpose of subscribing to the policy was to defraud the creditors, then the protection accorded by this section is taken away,” adds Shaikh.
Also, you have to ensure that your policy is brought under the act right at the time of policy purchase. You do not have the option of taking this step later when you accumulate debts. “At the time of inception of the policy, the policyholder needs to fill MWP addendum for assigning the policy under MWP Act. This can be done only at the inception of the policy and not later,” says Rushabh Gandhi, Deputy CEO, IndiaFirst Life Insurance. While some life insurers could ask you to fill up a separate form for the purpose, in most proposal forms, all you need to do is to tick the relevant boxes.
MWP and women life assured – the grey area
The Act came into being way back in 1874 and, hence, perhaps, the focus was on men. “It applies to married or divorced women and widows of the Christian and the Parsi communities,” says Iyer. It is not applicable to married women from Hindu, Sikh, Buddhist, Muhamaddan, and Jain communities.
For women from Christian and Parsi communities, the Act mentions that married women can purchase insurance policies on their own behalf and are independent of her husband. “The proceeds shall be treated as her separate property. However, there is no express mention that proceeds received on insurance policy subscribed to by women are shielded or protected from her creditor’s claims (like it has been specifically, provided for in the insurance policy subscribed by married man under Section 6 of MWP),” explains Shaikh, adding that many insurers do offer products to women under the Act. Their children are meant to be the sole beneficiaries. “Now, whether or not such insurance proceeds will be used for fulfilling debts of the woman subscriber is a question. Technically, if the proceeds will be treated as separate property, they could be used for paying off the liabilities,” she adds.