Debt is no more considered a sign of financial stress for an individual. From buying grocery to electronic items, credit has become a way of life. And why not? You get incentivized by reward points on purchases from your credit card, you get free insurance on buying through equated monthly instalments (EMI) from a finance company and you can always repay in easy instalments without paying a penny towards interest. And on top of all, buying on credit has become hassle-free. However, it’s still noteworthy that debt also brings along an equal quantum of responsibility along with it. Things are rosy until your repayments are regular. And what if after your death, your family, yet to recover from the shock of losing you, goes through the trauma of having lenders at the doorstep.
It’s a common phenomenon that after the borrower’s death, the creditor recovers his dues from the assets the borrower has left behind. This very thought haunted most of us before taking on more debt and we could only wish there was a way we could secure our family and their assets from our debt. Indian law, under the Married Women’s Property (MWP) Act, 1874, allows you to create a fence to protect your family from your personal debt.
By Shyamal Banerjee/Mint
Section 6 of the MWP Act allows an individual to buy a policy for himself under the Act and create a trust for the same. This policy is free from creditors, court attachments and creditors would not form part of his estate. However, the law also explicitly states that if the policy has been effected with an intention to defraud creditors, these laws would not operate to destroy or impede the rights of any creditor to be paid out of the proceeds of the policy.
In this policy, the policyholder (the husband) loses all control over the policy with the exception of paying premiums and the policy becomes a property of his wife in the form of a trust where the beneficiary of the trust is only his wife and children. Thus, even if the husband dies before clearing all his debt, still the creditors would not be able to claim the funds from this policy as the policy from the very first day is the property of a trust and not his personal estate. In case the husband has not appointed any trustees, the estate shall be transferred to the Official Trustee of the State.
Besides the insurance policy bought by the husband for the benefit of his family, the Act also empowers the wife to buy a policy for herself independently of her husband which would also be considered her separate property as if she is unmarried. Thus, if your wife is an earning member of the family and has an income that is substantial to buy life policies, you should encourage the idea as it’s totally in line with the concept of insurance protection; especially if you have taken on huge debt for your business. Shalini A. Gupta thanked her fortunes when her lawyer informed her that she could defend her own insurance policy from her husband’s creditors under the MWP Act. Her husband, Ashish Gupta, who died in a train accident in Mumbai, had taken on huge debt early in his business for expansion. His personal estate and his life insurance were not sufficient to repay all his dues. She is happy to have fenced her own money-back insurance policy which she feels would help her a lot in bringing up her kids in the future.
The Married Women’s Property Act is still very uncommon among the general public in India and not many are aware about its features and the protection it provides. However, a policy under this Act is a must for families that have huge debt and do not have sufficient financial provision.
Hiren Dhakan is associate fund manager, Bonanza Portfolio.