Policies purchased under MWP Act, 1874 – 3

 Policies purchased under MWP Act, 1874 – 3

Any Trust is managed by Trustees appointed as per the Trust deed and rules. What really happens is the policy moneys now cannot be touched by the policyholder. That is why this policy is beyond the reach of the creditors of the policyholder. We have now three parties, viz. the policyholder, the Trust & Trustees and the beneficiaries.

It is the duty of the trustees to protect the interests of the beneficiaries. It is very important, therefore, to make a proper selection while appointing the trustees. The Act provides that if no trustee is appointed by the policyholder the Official Trustee of the State shall be the trustee for the Trust. Several banks have intimated their willingness (for e.g. State Bank) to LIC to act as Trustees of LIC policies. List of such institutions that have consented to be Trustees of LIC policies is available in LIC’s Manual on MWP Act. I am not aware whether such consent is available with other private insurance companies. The third option is to appoint individual/s as trustees.

You can have thus any from the three types of trustees – official, institutional or individual/s. In any case remember that your policy money will be dealt by the trustee/s while you are alive or dead. So always select totally dependable persons who have a natural and real interest in the well being of your family and children.

One of the main problems I have found in real experience is that while selling the policy a trustee is appointed somehow, the priority is on selling the policy. Please do not do that. There shall be a condition in the rules that the policyholder retains the right to appoint another trustee if the present trustee dies, is in prison, or resigns or is in a foreign country not capable of acting as a trustee or is incapable of acting due to old age, illness etc. If this right is not retained it may require court’s intervention for making changes and authorizations in the trust especially when some of the beneficiaries are minor.

But let me tell you sec.6 (1) of the MWP Act, 1874 opens a mine of new insurance business before you. Today people need protection for their money along with that for their dependents. While the protection u/s 60(1) (kb) of Civil Procedure Code is available to ‘judgment debtors’ the protection of sec. 6(1) is available to the beneficiaries of anyone who purchases a policy under that section. Learn all about the Section, Trusts and Trustees. Businessmen, industrialists, traders, landlords and estate owners – even those people who have taken loans from financial institutions on the strength of their property - all have an interest in creating a separate protected property for their family and children. To them the answer is life insurance policy u/s 6(1) of the MWP Act, 1874. We shall continue this discussion.

Key words:

MWP Act, 1874

Trust Deed

Trust Rules

Trustees

Policies purchased under MWP Act, 1874 - 2

A policy can be purchased and at the time of proposal itself it can be shown as a purchase under Section 6(1). So the main points to be noted are:

1. The policy shall be on the life of the husband / father

2. It is purchased for the benefit of his:

            a. wife

            b. wife and child

      c.wife and children (named/specified)

      d.wife and children(not named, i.e. as a class)

      e. child

      f.children

3. Where wife or child / children are named they become beneficiaries under the policy. When they are not named, i.e. they are named as a class a child born after the purchase of the policy or a new wife married after the purchase of the policy automatically becomes beneficiary under the policy.

4. There is no nominee under the policy. The concept is of beneficiary.

5. A Trust is to be created under the Indian Trust Act, 1882.

6. Life Insurance Corporation of India gives the necessary forms and addendums to proposers to create Trusts and frame Trust rules. I am not aware whether other insurers do this.

7. Trusts are to be managed by Trustees. So the proposer appoints Trustees of his choice. If he does not appoint Trustees the Official Trustee of the State acts as Trustee.

8. These processes are simple and easy.

9. ‘A’ purchases a policy. Simultaneously he fills the addendum and creates a Trust. Trust will be managed by one or more Trustees appointed by ‘A’ through the addendum. Any one can be Trustee, for example father of wife.

10. No stamp duty is required to create a Trust at this stage.     If ‘A’ dies, claim will be paid to the Trustees by the insurer. Trustees will hand over the claim to the beneficiaries. This policy is treated as a separate estate for the benefit of wife and children and cannot be claimed by the creditors of ‘A’. It is beyond their reach.

Key words:

MWP Act, 1874

Trust

Trustee

Beneficiary

Protecting the policy moneys

Policies purchased under Section 6(1) of Married Women’s property Act, 1874

I have been taking you through aspects of assignment from the angle of protecting policy moneys and life insurance marketing. We shall come back to assignment a little later. Remember, assignment cancels nomination, with one exception already discussed.

There is another provision of law that does not allow nomination and it absolutely protects policy moneys from creditors of husband / father. And this is a wonderful marketing tool for those professional salesmen who approach prospects after good homework. Many prospects and policyholders these days  are capable of distinguishing the good, the bad and the ugly among salesmen.

There are many provisions that protect life insurance policy moneys. Those interested may go through the chapter on ‘special provisions that protect policy moneys’ in the book ‘Modern Trends in life insurance’ or a paper with the same name in the Journal of Insurance Law (author V.N.S.Pillai), both published by ICFAI University Press. Please visit their site or contact them for copy of the paper.

Let us read Section 6(1) of MWP Act, 1874:

6. Insurance by Husband for Benefit of Wife

(1)    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 his wife and children, or any of them, shall enure and be deemed to be a trust for the benefit of his wife, or his wife and children, or any of them, according to the interest 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.

            When the sum secured by the policy becomes payable, it shall,  unless special trustees are duly appointed to receive and hold the same, be paid to the Official  Trustee of the [state] in which the office at which the insurance was effected is situate, and shall be received and held by him upon the trusts expressed in the policy, or such of them as are then existing.

And in reference to such  sum he shall stand in the same position in all respects as if he had been duly appointed trustee thereof by a High Court, under Act No.XVII of 1864 [to constitute an Official Trustee], section 10.

Nothing herein contained shall operate to destroy or impede the right of any creditor to be paid out of the proceeds of any policy of assurance which may have been effected with intent to defraud creditors.

We shall see in detail in the coming Posts how a policy purchased under section 6(1) of the MWP Act, 1874 works.

Key Words

Married Women's Property Act, 1874

Official Trustee

Trust

Assignment of a life insurance policy – 11

Assignment and marketing

In the last Post I have discussed how assignment can be used to bring in more new business. If more new business does not flow in it is due to refusal of the marketing people to learn. Many of them stand on the periphery of knowledge and demand more importance from the society and their companies than they give unto them.

We know that assignment is transfer of property. Have you ever compared this transfer with transfer of some other property, say land / building. A father will transfer property worth Rs 10 lacs to his daughter through a partition deed on her marriage, which is expected after 10 years. You, as a dependable salesman, suggest to the father now to purchase a Rs 10 lakh with-profit policy for 10 years (Marriage endowment of LIC, for example) and conditionally assign it to the daughter. Let us see how these two transfers operate on the finances of the father.

Expenses on transfer                                         Land                           Policy

1. Fee for document writer                             Rs.    25, 000                   Nil

2. Stamp fee @10% (minimum)                    Rs.1, 00, 000                  No stamp fee

3.Costoftraveltosub-Registry(minimum)       Rs.       1,000                  No such cost                  

4. Miscellaneous expenses                             Rs.    10, 000             No such expense

                                                           Total   Rs. 1, 36, 000            No expense

These figures may vary for different States of India. But the fact remains that when the father transfers land or building he spends around 13.6% of the cost as avoidable expense.

 When he transfers money to daughter through a life insurance policy he gains in three ways (in the example)  (i) saving of Rs 1, 36, 000 (ii) policy brings an additional income by way of bonus, assuming Rs 40/00 the daughter gets Rs 4 lacs more on her marriage (iii) if the father dies during the premium paying period no premium need be paid thereafter   and the Rs 14 lacs will be directly paid to the daughter by the insurer. This is the security a father can give to his daughter. In father’s absence who knows how the equations of partition will change among legal heirs?

My question to the salesmen of life insurance is; have you ever used assignment as a marketing tool in this way? If not, use it.

Assignment of a life insurance policy – 10

Assignment and marketing

Rule 19 (a) to (f) of the Provident Funds Rules [of India] provides for ‘Financing of member’s life insurance policies’. Readers are advised to read and understand the rule.

Here the proposer submits his proposal to the life insurance company and the payment of premium is shown as financed from provident fund. The necessary forms are submitted. After underwriting if the insurer decides to accept the proposal he sends a request to the authority in charge of the PF of the proposer (like Account General (in case of state government), Trustees of PF Trust (in case of own PF Trusts of companies such as SAIL). The proposer submits this request along with a non-refundable loan request to the authority. The authority sends the amount of premium to the insurer directly, showing this as a non-refundable loan of the proposer. The policy is simultaneously assigned to the AG or PF Trustees.

Every year the policyholder shall submit a non-refundable loan application to the PF authorities along with premium notice. If this is not meticulously done and followed up the policy will lapse and PF will lose the amount of premium.

PF grants compound interest to subscribers. If the term of the policy is long the bonus from the policy may be less than the compound interest income. Hence it may prove to be a loss to the policyholder.

But it has some advantages. The proposer does not feel any burden of payment of premium. There is no recovery for premium. On one recovery for PF he gets both PF benefit as well as life insurance benefit. Secondly if the term of the policy is kept short bonus may be more than interest. On maturity of the policy the claim is paid to PF. This will fetch more interest for the policyholder. Thirdly, accident benefit, permanent disability benefit, critical illness benefit etc will be available to the employee through the policy, which will not be available if the money is kept in PF. Fourthly, there is a limit for granting refundable PF loans, such as six times the salary or 90% of contributions, whichever is less. Most senior employees have crossed this limit. That is, funds beyond this in PF is beyond his reach   and part of this can be transferred as premium on short term policies. Fifthly since PF financed policies are always of ‘yearly mode of premium payment’ the tabular premium gets rebate of 3% (in case of LIC policies).

On premiums paid from PF no second time Income Tax benefit will be available.

Splitting of life insurance policies

Do you know that one  life insurance policy can be split into many pieces, i.e. smaller policies? Insurers like LIC allow this. This is truly a step in the direction of customer orientation. To take an example one policy of Rs 10 lacs (sum assured) may be split into ten policies of Rs 1 lac each or five policies of Rs.2 lacs each or one policy of Rs.5 lacs + five policies of Rs 1 lac each etc. Such a step will be a help to those customers who find it difficult to pay high premium at a time. The mode of payment of premium of each new policy (one may be yearly, another half-yearly, another quarterly and yet another monthly) can be kept different so that premium will fall due on different dates. Moreover if the customer wants to assign the policy to each of his children that too can be easily done. For more details please read my article on the subject published in The Hindu Business Line, a link is available on the page 'other publications'.

How to ensure that entire policy moneys go to the daughter?

  

This is answer to the query raised in Post dated 15^th September 2013. 

There are three methods to ensure that the entire policy moneys go only to the daughter in a Marriage Endowment policy. They are:

i.                    Absolutely assign the policy to the daughter

ii.                  Conditionally assign the policy to the daughter

iii.                Nominate the daughter as per guidelines of the insurer

The procedure prescribed for nomination in a Marriage Endowment policy is different from nomination procedure in other plans. In other Plans proposed nominee’s name is to be written in the space provided for that in the proposal form.

In Marriage Endowment Plan the nomination procedure is as follows:

i.                    In answer to the question ‘what is the object of insurance’ in the proposal form write the words “see slip” and submit the duly completed addendum (slip) which is given in the Agents Manual. The wording of the slip is as follows: “This policy has been taken out by me for the marriage of kum x who is my daughter and is dependant upon me for the necessaries of life and shall be considered as a policy earmarked for her marriage”. This slip shall be submitted along with the proposal under the signature of the proposer

ii.                  Alternatively, the proposer may write after the name of the nominee in the proposal form the following words, viz.” Kum X, being the daughter who is dependant upon me for the necessaries of life and for whose marriage this policy has been earmarked”.

iii.                When (i) or (ii) is done the life insurance company places the following endorsement on the policy, “This policy has been earmarked by the assured for the marriage of his daughter kum x and is dependant upon the assured for the necessaries of life”. Only when this endorsement is available on the policy bond the policy moneys go to the daughter fully. Otherwise policy moneys belong to all legal heirs.

                 

iv.                 If you have not given the addendum earlier while purchasing the policy do it now and submit it to the life insurance office and get the policy endorsed with facts in your addendum.

For more details you can read my article on the subject published in The Hindu Business Line. A link is provided to that in the page 'other publications'.

Key words:

Marriage Endowment Policy

Absolute assignment

Conditional assignment

Nomination

A query

Let this Post be a query that pertains to the Marriage endowment Policy of the Life Insurance Corporation of India. Many of you are selling this policy to parents of daughters promising them that the insurance company will pay the maturity amount of the policy (in case of death of the life assured during the term) to the daughter for her marriage.

                   

Please guide the policyholder in view of the following, which I am sure many of you have not considered at all, while giving the advice at the time of selling the policy:

(i)            Even in case of death claim the insurer pays maturity claim in this policy. You will agree    with me that maturity claim cannot be paid to nominee.

(ii)          Death claim does not belong to the nominee. It belongs to all the legal heirs of the life  assured. So the daughter (who is nominee) will get only a share of the claim in her    capacity as one among the many legal heirs. She is not eligible to get the entire claim.

In view of the above, what is the proper advice so that the entire claim amount goes to the daughter? You can send me your advice. Or you can look forward to my next Post for ‘Agents’.

Hereditary Commission and right of heirs (of Agents)

The right of heirs to receive the commission on renewal premium does not arise under any law of succession and it is a right directly conferred on heirs by Section 44(2) [of the Insurance Act, 1938]. But the statute which conferred such right is competent to provide exception in certain cases and take away such right. The proviso has taken away this right of heirs in the event of the Agent making nomination in favour of a particular person (B.M.Mundukur v.LIC(1977) 47Com Cas 19) [Quoted from The Insurance Act, 1938 together with Legislative history, comments and case law, 1986 published by Eastern Book Company]

In other words, in Agency, the nominee becomes owner of the hereditary commission (whereas in a policy nominee has no right on policy moneys). 

In Agent's interest

Your duty to give premium notice to the policyholder!

I am reproducing below Regulation 8(iii) of the IRDA (Licensing of Insurance Agents) Regulations, 2000 for your benefit:

Regulation 8(iii) Every insurance agent shall, with a view to conserve the insurance business already procured through him, make every attempt to ensure remittance of the premiums by the policyholders within the stipulated time, by giving notice to the policyholder orally and in writing;

Key words:

Life insurance
Premium notice
IRDA Licensing Regulations,2000
Duty of Agent