582639 SIP myths you must know!

Is buying adequate life insurance enough to protect your family financially? In the aftermath of the Covid-19 pandemic, many people have aimlessly bought a life insurance policy like a first aid box for their families. But do you know the exact practical application of this financial instrument? Will it really come to your rescue when required? Are you well aware of the terms and conditions that follow for a claim disbursal? Consider a scenario where you buy an insurance policy worth Rs 1 crore alongside a huge personal loan taken a year ago for a health emergency. Do you realise that, in this case, your creditor will have the primary claim over your insurance proceeds in case of your sudden demise?

Yes, you could be a skilled financial planner and ensure to buy a cover that provides coverage for your loan as well as your family’s sustenance. But such people are more or less in minority. Hence, what is the way out of this tricky situation to ensure that your claim proceeds reach your family before creditors? The answer lies in the Married Women’s Property Act (MWPA).

How does MWPA help?

The assets of a deceased person are always used to first pay off the pending liabilities under his name. Family members/legal heirs are considered only second to creditors when it comes to the rights on a deceased person’s financial assets. But if you bring your policy under the purview of the MWP Act, the insurance is automatically excluded from his/her estate and cannot be used to pay off any existing liabilities. This facility will give you a guarantee that the insured sum will be given to your wife and children in case of any unfortunate event.

While buying a life insurance policy a person is expected to give the name of a nominee. When the person is young and unmarried, one would normally give the name of father or mother as the nominee. Once you’re married, the nominee changes to the spouse in most cases.

“In the past, there were cases where mother and widow of the expired person went to the life insurer and claimed the sum assured payable under the policy. To avoid this difficult situation, any person can put their policy under the MWPA Act. This will make sure that the claim amount is transferred to the wife,“ said S. K. Sethi, founder at Ria Insurance Brokers.

It should be noted here that only married males can opt for this facility and the decision to bring your policy under MWP Act can be taken only at the time of purchase. This means your existing term plans cannot be modified and bought under MPW. Meanwhile, this type of policy cannot work in reverse, i.e., a wife cannot make her husband the beneficiary and enjoy the benefit of this Act.

Apart from regular salaried individuals, businessmen are specifically recommended to bring their insurance under MWPA as it can be helpful in case of insolvency.

How is the claim amount received?

Contrary to popular belief that buying a term policy under the MWPA leads to the creation of a trust to which the claim proceeds are transferred, Sethi termed this facility as a ‘one side commitment’ which is honoured by the life insurer by giving claim amount to the widow directly. The payment goes to the account of the widow on submission of required documents like original policy papers, marriage certificate, death certificate of the deceased husband, etc.

Watch outs

Bringing the insurance policy under the purview of MWPA sounds perfect until now. Then, why wouldn’t everyone opt for it? Well, here’s what can go wrong for you. MWP Act is meant strictly for the financial protection of wife and children – it’s earmarked only for the beneficiaries. This means the policyholder will get absolutely nothing if h/she outlives their term plan.

Further, as Sethi explains, “The implication of MWP Act is that once the nominee has been decided, it cannot be changed at a later date. This is a one-sided decision and one should use it only after knowing this fact.”

However, he added that according to the Act, the nominee can be changed only in case of the death of the existing nominee or due to a divorce.