Why one must have a combination of Term Life Insurance and MWP Act while buying term life insurance? Many of us nowadays buy term life insurance but are you sure that the death claim will be handed over to your family safely? When I say family, then it means your wife and kids.
Usually, nowadays many of us have one way or another way of being on loan. It may be a home loan, credit card loan, or some other form of a loan. In such a scenario, if death happens, then these creditors may approach the court to claim the loan amount from your life insurance proceeds.
Let us see few live examples where your term life insurance benefit may not be handed over to your family (wife and kids).
# Suppose Mr. A has a home loan of Rs.1 Cr and he has Rs.2 Cr Term Life Insurance. In such a scenario, if sudden death of Mr.A may prompt the lender to approach the court and claim the dues from your life insurance proceeds. Post settlement, your family may end up with an Rs.1 Cr benefit from insurance proceeds rather than your assumed benefit of Rs.2 Cr.
# Assume that you are a businessman and you owe money to someone. After your death, the creditors may approach the court and they will get the money out of your life insurance proceeds.
# If you have not created your will and there are family members who claim their right in your life insurance proceeds. Here, family means other than wife and kids.
# In the future may be due to certain family issues, you may don’t want the life insurance proceeds may not benefit your wife and kids.
How well are you prepared for such situations especially if such situations happen in your absence? There is a way to protect your wife and kids from such scenarios under the law. This is called as MWP Act or Married Women’s Property Act.
Term Life Insurance and MWP Act – Protect insurance from creditors and relatives
The Married Women’s Property Act, 1874 came to force on 24th February 1984. According to MWP Act. the earnings of a married woman in India are considered her own property and this Act Protects the property owned by a woman from Creditors, relatives, and even their husbands.
MWP Act 1874 under which Section 6 deals with life insurance. If you buy life insurance under MWP Act, then it will protect the women’s right on the life insurance proceeds money in all cases. Even the husband can’t do anything about it once the buying is bought under the MWP act. This applies to all kinds of insurance policies be it a ULIP, term plan, or an endowment/money-back plan.
The preamble of the section clearly mentions this as below.
“A policy of insurance effected by any married man on his own life, and expressed on the face of it to be for the benefit of his wife, or of his wife and children, or any of them, shall endure and be deemed to be a trust for the benefit of his wife, or of his wife and children, or any of them, according to the interest so expressed, and shall not, so long as any object of the trust remains, be subject to the control of the husband., or to his creditors, or form part of his estate.”
It means that the proceeds of insurance policy shall be received and kept by the Official Trustee same as trust reposed on the insurance policy. It is guarantees that the proceeds from life insurance policy are free from any creditors or court attachments.
However, there is one important point to be noted which many miss to read and understand and that is – “Nothing herein contained shall operate to destroy or impede the right of any creditor to be paid out of the proceeds of any policy of assurance which may have been effected with intent to defraud creditors“.
If the creditors prove that husband took the loan with an intention to defraud, then this act will not protect your wife and kids. Hence, the intention of going for credit should not be to defraud.
How to buy the life insurance to cover under MWP Act 1874?
The policy can be taken only on one’s own name, i.e., the life assured has to be the proposer himself. Any type of plan can be endorsed to be covered under MWP Act like Term LIfe Insurance, Endowment Plans, Money Back Plans or ULIPs.
Any married man can take a life insurance policy under MWP Act. This includes divorced persons and widowers. The policy can be taken only on one’s own name, i.e., the life assured has to be the proposer himself. Any type of plan can be endorsed to be covered under MWP Act.
At the time of buying life insurance, a separate from has to be filled by the proposer for it to be covered under MWP Act. The form will seek details of the beneficiaries, the share of the benefits that are to be accrued to them and the trustees.
Note that it can’t be added separately once you have completed the process of buying the life insurance and policy is issued (means you can’t add the MWP act later).
Who can be the beneficiaries under MWP Act?
- The wife alone
- The child/ children alone (both natural and adopted)
- Wife and children together or any of them
Who can be a trustee?
Unlike beneficiaries, having trustee is not mandatory for this MWP Act. The policy holder can mention one or more trusties. Having a Trustee is not compulsory but if the beneficiary is minor then in that case it is compulsory to have a Trustee. The Trustee should not be minor. The Trustee can be change whenever the policy holder wanted. The Trusties can be –
- A person
- A bank
- An institute
- Beneficiary herself/himself
Can beneficiary and trustee be the same person under MWPA?
The Beneficiary and the Trustee can be the same person (e.g. Your wife can be both the beneficiary and the Trustee). The trustees can be the wife and/or one or more of his adult children, or a third person.
Few points to note while opting for MWP Act –
# You can’t assign the policy to someone or you can’t avail the loan on such policies.
# Surrender request should come from policyholder and signed by the Trustee (if appointed) and beneficiary. The beneficiary should be major at the time of request. Surrender proceeds will be paid to the Trustee/Beneficiary. The policy maturity benefits will also go to the Trust.
# Even a married woman can buy MWP policy on her name with her children as beneficiaries, the husband will not get anything from the policy. It will be considered as a separate asset as if she is unmarried.
# The Beneficiaries cannot be changed. In case at some point you decide to change the beneficiaries, then it won’t be possible if you sign a MWP addendum.
# If your beneficiary (wife) passes away before you, the legal heir of the policyholder shall be eligible to receive the claim amount. However, it is advisable to mention more than one beneficiary at the time of taking the policy.
# You can have more than one plan under the MWP Act. But you have to register each one of them separately under MWP Act.
# Parents cannot be added as the beneficiaries under the MWP Act. Only your wife/kid/kids can be chosen as beneficiaries.
# Surrender request should come from policyholder and signed by the Trustee (if appointed) and beneficiary. The beneficiary should be major at the time of request. Surrender proceeds will be paid to the Trustee/Beneficiary. The policy maturity benefits will also go to the Trust.
Let me explain the whole content with below image.
Disadvantages of buying policy under MWP Act
There are few disadvantages also of buying policy under MWP Act.
# You can’t change the beneficiaries in middle. Hence, if family feuds turn into divorce, then your wife can still claim the benefits. The only way (which I personally not suggest) is if unluckily such a situation arise and you have term life insurance, then simply default the premium. The policy will turn into lapsed. Immediately you can buy one more new policy. It may be bit harsh advice from me. But I am just sharing you an option. However, if you have a traditional or ULIP plans, then surrender request has to be from policyholder and signed by the Trustee (if appointed) and beneficiary. The beneficiary should be major at the time of request. Surrender proceeds will be paid to the Trustee/Beneficiary. The policy maturity benefits will also go to the Trust.
# You can’t assign or take a loan on such policies.
# You can’t add this feature in the middle of the policy.
