How to keep your life insurance payout safe from creditors

Dr. Deepti Dwivedi
MWP Act for Life Insurance

Have you heard about the Married Women’s Property Act in Life Insurance? This article is a must read if you have taken loans and have a possibility of creditors reaching out to your family for loan repayment if something were to happen to you. 

MARRIED WOMEN’S PROPERTY ACT (MWP ACT)

The Married Women’s Property Act 1874 (MWP Act) was created to protect the properties owned by women from relatives and creditors. Section 6 of MWP covers life insurance plans which allow any married man to take an insurance policy under this Act.

Under the Married Women’s Property Act, a woman’s property is shielded from creditors and court attachments. In addition, this Act protects her assets against any income tax department attachments that the husband generates.

HOW DOES THE MWP ACT WORK?

Let’s take an example of a family business dealing with trade and manufacturing. When it comes to business, you’ll inevitably come across some credit limits and bank loans. These are secured by your company’s assets and require a personal guarantee from their owner, the husband, or a family member.

As a guarantor, the husband’s untimely death while their loan is still outstanding; the bank tries to recover the loan through the liquidation of assets of the business and attach properties belonging to the husband.

In the event of your death, the legal heirs of your estate may not receive any proceeds from life insurance because creditors and other parties have the right to claim this money if money is due to them.

Life insurance policies should be made under MWP Act to ensure that the family is protected because your life insurance payout are also entitled to be attached without MWPA. This means that when a claim on the death of a husband or father goes out, it will go straight to the bank rather than survivors in the family. If you have life insurance under MWPA then the money goes to the family survivors rather than creditors.

You can read on further to know more about MWPA or you can reach out to me to discuss more about this. MWP is quite important if you have taken loans and want to ensure you can keep your family financially protected in case something happens to you.

KEY FEATURES OF THE MWP ACT

Difference between a nominee and a beneficial nominee

Nominees until now functioned as receivers of the insurance proceeds on behalf of policyholders’ heirs. The revised Insurance (Amendment) Act 2015 has made a ‘beneficial nominee’ category, making spouses, parents, and children eligible as final insurance money recipients.

Why nomination alone is insufficient

As a husband, you can list your wife and children as beneficiaries of life insurance policies, preventing others from claiming the benefits if you happen to pass away. The proceeds of a life insurance policy may still be recovered by one’s creditors if some money is due to them or even by the legal heirs of the deceased. Their rights supersede that of beneficial nominees.

Purchasing life insurance under MWP Act is a possible solution.

You can protect your life insurance policy from being used as a creditor’s tool by buying it under Section 6 of the Married Women’s Property Act. This section covers one’s wife and children, so creditors cannot take money out of an MWP-protected policy to clear their loans or those owed to them if you die without leaving assets behind.

What the law states:

“Section 6 of the Married Women’s Property Act (MWPA), 1874, provides that 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 ensure 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 interests 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”.

Eligibility under the MWPA

Any married man residing in India (except Jammu and Kashmir) can avail advantage under this Act. A ‘married man’ here can include a widower and a divorcee who can name his children, as per his wishes, as recipients in a policy endorsed under this Act. Under the Act, only the wife and children are entitled to be recipients. The policy prevents any other family member from claiming it. In the case of separation of husband and wife after the policy is taken, the recipients that are the wife and children, will continue to stay the same however they can be modified if required. 

Safeguard interests under the MWPA

One of the benefits of purchasing an insurance policy under the MWPA is that it’s entirely in your immediate family’s hands. As long as you and any other beneficiaries are alive, no one will be able to touch what belongs solely to those who should rightfully receive this benefit.

How to go about the process

One can do this by filling in an MWP addendum while applying for insurance without formally creating a settlement deed or a trust separately. The only way to obtain this benefit is while taking the policy. Further, any addition or changes in the endorsement of the policy under the MWP Act is not allowed later on, which means that even the husband (the insured) cannot change the policy’s beneficiaries later on. 

Once the policy is bought under the MWP Act, it simply means that any insurance policy taken by the husband and endorsed under the MWPA in favour of his wife or children or any of them, will always be their property. None of the husband’s creditors will have any right over the policy. Even the husband’s parents won’t have any right to the benefits. In fact, the husband will also have no rights over the survival benefits of the policy, if any. As per the Act, as long the beneficiaries named in the policy are alive, no one else will have any right to the benefits.

This is particularly relevant in case of a joint family as there can be other claimants to the policy proceeds if the insured dies. Therefore, do not overlook it to avoid any legal hassles for surviving family members.

Want to know more about Married Woman Property Act? Let’s connect and explore how we can use this to safeguard some of your assets.