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Barely Known – Life Insurance Policy Under MWP Act

Mahesh has recently started a business in partnership with his friend. He has used a substantial part of his savings and has also taken huge loans to fund the venture. Mahesh is 40 years old and has two school going children and a homemaker wife. Mahesh understands that should he be unable to pay his creditors, his assets (house, car, fixed deposits, mutual fund investments, life insurance proceeds, etc) will be attached by his creditors to recover their dues.

Mahesh wants to ensure that his wife and children’s future is not impacted in case of such an unfortunate eventuality. He plans for this contingency by taking a life insurance policy on his life under the MWP act. But isn’t a life insurance policy a part of his assets and why would his creditors spare the policy? The answer to this lies in it being a policy issued under the provisions of the MWP act.

Read on to know more about the MWP act and the benefits associated with it.

What is MWP act?

The Married Women’s Property Act (MWP Act) was enacted in 1874. It was created to protect the properties owned by women from relatives, creditors and even from their own husbands. Section 6 of the MWP Act covers life insurance plans. Any married man (including widowers and divorcees) can take a policy under the MWP act. Each policy under the MWP Act is considered as a special trust.

What the law says:

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 an object of the trust remains, be subject to the control of the husband, or to his creditors, or form part of his estate. 

How does MWP Act protect your wife and children?

The proceeds of a life insurance policy under the MWP Act cannot be claimed by creditors, relatives (even parents and siblings) or form a part of the will (estate of the proposer). Thus, this is a foolproof way to ensure that the financial future of your wife and children are protected.

Isn’t nomination sufficient?

You may be thinking, making your wife and/or children as the nominee(s) in your policy will be sufficient to ensure that the proceeds are paid out to them and why should you unnecessarily buy a policy under the MWP Act. However, merely nominating may not serve the purpose.

In case of a claim, the insurance company will hand over the proceeds to the nominee. Here, please note that nominees have been viewed as mere custodians of life insurance proceeds and not ultimate beneficiaries.* The creditors can lay a claim on the proceeds. In this aspect, a policy under MWP act scores over nomination as the MWP policy is treated as a trust and the insurance proceeds are free from creditors, court and tax attachments.^ Only the named beneficiaries have a right over the proceeds.

Who can be the beneficiaries?

  • The wife only or

  • The child/children (natural/adopted) only or

  • The wife and children together

How to buy Life Insurance under the MWP act?

The husband needs to apply for a policy on his own life. Along with the application for life insurance, he is required to submit the MWP addendum/form (provided by the life insurance company). The addendum is available on the life insurance company’s website.

The following details need to be provided in the addendum:

  • Beneficiary name

  • Relationship

  • Date of birth

  • Benefit share percentage – in case of more than one beneficiary 

Accordingly, the policy will be issued under the MWP act provided that the addendum is complete in all respects as desired by the company. ‘MWP act policy’ is mentioned on the face of the policy contract by most companies.

  • Are there any charges to buy a policy under MWP act?

There are no additional charges to be paid for getting a policy issued under MWP act.

  • What benefits accrue to the beneficiaries?

All payable benefits under the policy such as Maturity, Partial Withdrawal, Survival benefits, Paid-Up policy proceeds, Surrender and Death proceeds.

  • Can the beneficiaries be changed?

No. This is an important feature which protects the interests of the beneficiaries as even if there is a separation or divorce at a later stage the husband will not be able to change the beneficiaries.

  • What is the husband’s role in the policy?

The husband is the life insured and the policyholder. He is responsible for making the premium premiums but benefits are not payable to him.

  • Can the policy be assigned?

No, assignment of policy (transfer of ownership) or policy loans are not allowed by most companies for MWP policies to safeguard the interests of the beneficiaries.

  • Can a policy be converted into MWP Act after policy issuance?

No, you can opt for this only at the time of policy issuance.

  • Can you have more than one MWP policy?

Yes, you can buy multiple life insurance policies under the MWP act.

  • Which plans can be bought under the MWP Act?

Any type of life insurance – term, endowment, money back, ULIP can be purchased under the MWP Act.

  • Who should opt for policies under MWP act?

It is especially useful to safeguard the interests of the wife and children of self-employed persons, entrepreneurs or salaried people with loans or liabilities.

Also, people living in joint families can make use of this provision to ensure that the proceeds are paid to the wife and children and other relatives (parents, siblings) do not claim it.

The life insured can rest assured that in case of his untimely death, the life insurance proceeds will be paid to his wife and children only and creditors and other parties cannot claim it.

Illustration:

Ajay Sharma, a businessman had taken loans to finance his business. He had also purchased a term insurance policy under the MWP Act 1874. His wife was named as the beneficiary. After Ajay’s sudden demise in an accident, his creditors approached the court seeking their right to use the death benefit proceeds of the term plan to settle their dues. As the policy was issued under the MWP Act, the creditors lost the case and the court ordered that the death benefit is paid to his wife.

Downside:

The policy cannot be assigned. It cannot be used as collateral for loans. Also, all policy benefits will be payable to the beneficiaries and not to the policyholder.

Conclusion:

Though taking a policy under the provisions of the MWP act is simple and inexpensive, it is not widely used probably because of lack of awareness about this among the salesforce. With more youth preferring to be self-employed and the government of India promoting entrepreneurship, it is the right time for life insurance companies in India to highlight the benefits of the MWP act while soliciting new business.

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