Many policyholders assume that the life insurance payout they leave behind will automatically go to their spouse or children. However, financial experts warn that this may not always be the case, especially if the insured person dies with unpaid loans, business liabilities or personal guarantees.
Chartered Accountant Nitin Kaushik recently highlighted a lesser-known legal provision that can help protect life insurance proceeds from creditors and ensure that the intended beneficiaries receive the money.
According to Kaushik, a life insurance payout is not necessarily shielded from lenders if the policyholder has significant outstanding debts at the time of death.
“Most people assume a death benefit is a private inheritance. It isn’t. If you die with outstanding business debts or personal guarantees, your insurance payout is just another asset for creditors to seize,” he said in a post on social media platform X.
How creditors can claim insurance proceeds
Financial liabilities do not automatically disappear upon a borrower’s death. In certain circumstances, creditors can seek recovery from assets forming part of the deceased person’s estate.
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Kaushik explained the risk using a simple example. If a business owner has a life insurance policy worth ₹2 crore but leaves behind unpaid loans of ₹3.5 crore, creditors may have a legal claim on the insurance proceeds.
In such a situation, the entire ₹2 crore insurance payout could be used toward debt repayment, while the family may still face a shortfall of ₹1.5 crore.
What is the MWPA and how does it help?
To address this issue, Kaushik pointed to the Married Women’s Property Act (MWPA), 1874.
Under Section 6 of the Act, a married man can purchase a life insurance policy specifically for the benefit of his wife and children. Once a policy is issued under the MWPA, it is treated as a trust rather than a personal asset of the policyholder.
“When a policy is under MWPA, it is no longer part of the deceased’s estate,” Kaushik noted.
Because the policy benefits are held in trust for designated beneficiaries, creditors generally cannot attach the proceeds for debt recovery. As a result, the insurance payout remains protected and is paid directly to the wife and children named under the arrangement.
No additional cost, but an important trade-off
Experts note that opting for MWPA protection does not require paying a higher premium. It is typically implemented through a simple endorsement or addendum at the time of purchasing the policy.
However, the decision comes with restrictions. Once a policy is issued under the MWPA, the arrangement is irrevocable. The policyholder cannot later change beneficiaries or access certain policy benefits without trustee approval.
Kaushik said the provision may be particularly relevant for individuals with home loans, business borrowings or personal guarantees.
“If you have a home loan, a business limit, or personal guarantees, your insurance is currently a backup plan for your bank. Using the MWPA ensures the money actually goes where you intended,” he said.
For families relying on life insurance as a financial safety net, understanding the MWPA could make a significant difference in protecting beneficiaries from future debt-related claims.
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