You have taken a huge loan for your business against your assets. In the event of untimely death, creditors will attach your assets to recover their money, leaving your family in trouble. Is there a way you can safeguard your assets from creditors? I am sure there are many ways to guard assets from creditors. I do not have expertise to go into all those details. In this post, I will limit my focus to life insurance policies.
If you purchase life insurance under Married Women’s Property Act, 1974, you can protect the proceeds of such life insurance plans from creditors.
What is Married Women’s Property Act?
The Act was enacted to safeguard interest/properties owned by married women from creditors, relatives (including husbands), and court and tax attachments. Section 5 and 6 of the MWP act covers life insurance plans.
Married men (including widower and divorced) can purchase life insurance plans under Section 6 of MWP Act, 1874.
Widower or divorced can purchase the policy under MWP Act for the benefit of his children.
Points to Note
- Any type of life insurance plan (term plan, traditional plan, ULIP etc) can be bought under MWP Act.
- The beneficiaries under such plans can only be wife or children or both.
- The beneficiaries under such plans purchased under the Act cannot be changed.
- Such a policy can be taken only under own name i.e. life insurance must be on proposer’s life.
- Such policies do not form part of the husband’s estate.
- Husband continues to pay premium for the life insurance plan.
- The policy cannot be assigned for taking a loan.
Need for life insurance plans under Married Women’s Property Act
In case of sole proprietorship and partnership firms, the owners of the firm have unlimited liability. Thus, the creditors can liquidate the assets of the owners to recover their dues.
They can liquidate assets including but not limited to land and building, jewellery, vehicles, white goods, life insurance policies and other financial assets.
By purchasing a life insurance under MWP Act, you can take the life insurance proceeds beyond the reach of the creditors. Hence, in this manner, you can create an asset for your family which is truly theirs.
Assignment of the life insurance policy is not permitted if the life insurance policy is taken under Married Women’s Property Act, 1874. Since the assignment is not permitted and the policy is not part of husband’s estate, creditors cannot attach policy for settling their dues.
Who can be beneficiaries for life insurance plans bought under MWP Act?
Wife or children or both. Nobody else. Even your parents CANNOT be beneficiaries under MWP Act.
How to purchase a life insurance plan under Married Women’s Property Act?
You need to fill an additional form to get the policy covered under MWP Act. In the form, you will have to specify the beneficiaries of the plan, share of the benefits and trustees.
Can an existing life insurance be brought under Married Women’s property Act?
No. Policies can be covered under MWP Act only at the time of purchase.
Can life insurance policies bought under Married Women’s property Act be modified?
This is not possible. As the husband relinquishes the control of the policy as soon as policy is bought under the said Act, there is no way to modify the policy.
The policyholder only has the right to revoke the appointment of trustees and appoint other trustees in their place.
Subsequently, the role of the husband is limited to paying the premiums for the plan.
How are the benefits under the plan distributed?
Each life insurance policy under MWP Act, 1874 is considered a separate trust automatically. There is no need to create trust under the Trust Act.
Maturity or the death proceeds of life insurance plans purchased under MWP Act go to the trust, which distributes it to the beneficiaries.
In case no trustee is appointed, the benefits will be directly paid to the beneficiary.
Any exception to protection under Married Women’s Property Act?
Protection under Married Women’s property Act does not stand if the life insurance policy has been purchased with intent to defraud creditors.
I think this gives creditors a chance to challenge the policies bought under the Act.
In my opinion, this can be a problem for those life insurance policies which have an investment benefit too (traditional life insurance plans or Unit linked insurance plans). Creditors can challenge such policies on the ground that the policyholder intentionally channeled his assets towards life insurance (rather than repaying them) to fleece creditors. I don’t think this will be much of a problem with term plans. Please understand this is just my opinion.
Can women also purchase life insurance under MWP Act?
Yes, a married woman can purchase life insurance plans under Section 5 of MWP Act, 1874 (for married men, it was Section 6). All benefits from the policy will remain her separate property.
Please refer to MWP form on Max Life website (for married women).
Husband or Children or both can be beneficiaries under such plans. In contrast with policies for married men, she retains the right over the maturity proceeds of the policy.
I do not have much clarity about policies under MWP for married women.
Life Insurance policies bought under MWP Act can be really useful for those who run up significant debt for their businesses or otherwise. Such policies will protect your family from creditors in the event of an unfortunate demise. The creditors won’t be able to attach your life insurance proceeds to settle their dues.
Disclaimer: I am not a legal expert. There may be scenarios under which creditors can lay claim over the life insurance plans purchased under Married Women’s Property Act and engage your family in a legal battle. You are advised to consult a lawyer or an insurance expert if you seek protection for your family through Married Women’s Property Act.