Life Insurance carries an important place in the financial planning of an individual. This is the first product which generally is advised to buy so the financial responsibilities of the person can be taken care of in case of his/her untimely demise. After all, the goals firstly need protection in case of your absence, and life insurance policies clearly help in that.
But it’s not only the purchase of a product that helps in taking care of goals, but you also need to ensure or make a proper arrangement, so the purpose behind the product should get achieved too.
Yes, the broad purpose is giving financial protection to the dependents, but again, how would you ensure that money be used the same way you want it to be used. The family members would not be misled by some other product seller or money get misused.
The simple solution to this concern is to Involve the family members in the financial planning process and get them acquainted with the reasons for your buying life insurance and how to use the money in case of a claim. All this can be written in a financial Plan itself for easy reference of the stakeholders.
Or a bit technical, but the implementable solution is to form a Private Trust, where you yourself can create a structure on how to utilize the money and instruct trustees to do accordingly, and assign your life insurance policy to the trust.
I have seen, many families don’t get involved. Only in case of emergencies, they run here and there to find the answers, otherwise, they hardly bother. With all the reasons like – “My husband will look into it”, “My father takes care of this” etc. people tend to avoid such discussions.
But still, as a responsible person, you have to buy life insurance. So, we need to understand what could be the other better ways with which we may believe that the proceeds be used for what they are meant for.
Below are some of the lesser known ways to use life insurance policies in India:
Ways to use life insurance policies in India #1–Term Insurance with Monthly /Annual Payouts:
Depending on the Goal you want to support, with the kind of requirements that might have – in Lumpsum or Regular payments, you may consider going in for the other version of Term insurance where the claim can be taken in Monthly or annual payments.
There are some companies that also offer increasing payouts to take care of the inflation part. There are others that offer part in lump sum and part in regular payout terms.
I mean the whole point is if you think that your family members are not well equipped to handle the monetary affairs well, or they are expected to manage it well in case they receive the payouts on regular basis, then it’s wise to go with such a feature.
Ways to use life insurance policies in India #2– Nominations:
Nominee is the person who receives the claim amount. But that does not make the nominee the owner of the money. He/she has to distribute the money or share with the other legal heirs of the deceased. Right?
Well, in the case of Life insurance Policies in India, nominations rules have got modified in 2015. As per amended section 39 of the Insurance Act, when a policyholder nominates parents, spouse, or children, then the nominee or nominees will be beneficially entitled to the amount payable by the insurer. Means, then the death benefit will be paid to the nominee only and other legal heirs will not have a claim on the money.
So now, having a Right nominee whom you really want to benefit from this life insurance policy in case of your absence, should be mentioned.
Though they say that from 2015 onwards the beneficial nominee would supersede the WILL, still to be on a safer side it is wise to mention the same nominee in the will also as your heir for life insurance claims.
This is not all, you can mention successive nominations too in the Life insurance policies in India. As in if the first nominee is not available or alive to claim the policy, then second, and then third.
This way it becomes easy for the family members to claim the money with not much of procedural or legal hassles. Here again, this should better be supported by the provisions in the WILL (As a best practice).
Ways to use life insurance policies in India #3- Key Man Insurance:
This way to use Life insurance policies in India is important when you are running a business in partnership or under a company structure with people outside the family. As the name says Keyman Insurance is buying insurance for the key person in the business whose absence may lead to financial loss in the company or increase in Financial expenses as in you may require to bring in new talent and spend on their training.
As a part of business arrangement, at this moment you may have to buy the share of the deceased in the business by adequately compensating his/her family. To arrange for the lumpsum amount such policies always come in handy.
Please note that the Policy Premiums paid by the business is treated as a Business expense and are deductible from taxable income, and the claim proceeds if and when received will be treated as Business Income.
But it is important to understand the benefit sans the tax rule, so you may use it effectively.
Ways to use life insurance policies in India #4- Buying Policy under MWP act:
When the concern is to protect the Interest of Wife and children from the Creditors, or even from self, then buying a Life insurance Policy in India under Married Women Property Act, can be considered. Read more on creditor proof instruments here.
According to this act women will not have to part with any asset belongs to her and is not liable to pay off the loan taken by husband or his family. Her properties will be protected from all the court attachments or from any other legal proceedings going against her husband.
Section 6 of the Married women property act says that if a married man buys a life insurance policy in India in his own name for the benefit of wife and children then this policy will immediately become an asset of the beneficiary (wife/children) and creditors cannot attach this policy.
Not only creditors even husband cannot control this policy now except paying regular premiums. If Married women buys the policy in her own name under this act, then also the same rule applies.
You can buy any policy like ULIP, Traditional Endowment or even term insurance under MWP Act.
So, when you want to ensure that property proceeds should be used towards the benefit of your spouse and kids and have fear of it being attached or claimed by creditors, then you should buy policy under MWP.
Though I am reluctant in advising ULIPs. But in some cases, low-cost ULIPs may also be considered for this. Because In such cases there may not be death but other legal issues that may impact the family’s financial stability.
Ways to use life insurance policies in India #5– As an Estate Planning Tool:
You may also use term life insurance policies in India as an estate planning tool. In other words, for the proper distribution of wealth among legal heirs, to avoid family disputes, etc.
Let me share an example, the family wealth composition says that you have 2 real estate and equivalent of Financial assets.
On your demise, you want to distribute the assets as one property each to your 2 sons and equivalent of the amount to your daughter who is living abroad. But the available financial assets are meant to support your spouses’ old age. Here if you have a decent life insurance cover, then that can be nominated towards your Daughter. These days some life insurance policies in India are continued until 80-100 years of age. And the premium amount also less is if you buy in the early years.
This is one of the examples. There can be different other situations where life insurance policy proceeds may get fit in.
Ways to use life insurance policies in India– Conclusion:
All in all, every product comes with certain features. So does life insurance policies in India. How that is getting fit into your requirement and what are the alternatives available, that needs to be thought through the financial plan.
Financial Planning is not only about making investments in Mutual funds or stocks, but it’s for your overall wellness. Don’t look at your financial life in Bits and pieces, look at the broad situation, and take action to make it better and simple.