Financial experts are warning that life insurance payouts may not automatically go to family members if the policyholder dies with outstanding debts. According to chartered accountant Nitin Kaushik, if someone dies with unpaid loans, business debts or personal guarantees, their insurance payout becomes an asset for creditors to seize. As reported by Zee News, Kaushik emphasized that 'Your life insurance is not your family's money if you owe the bank' and cautioned that most people assume a death benefit is a private inheritance.
To illustrate the financial impact, Kaushik provided a specific example of a business owner with ₹2 crore in life insurance coverage but owing ₹3.5 crore in unpaid loans. According to the report, if this person passes away with unpaid loans, the court will not consider the widow's expenses, and creditors will take the entire ₹2 crore payout. The family would still be left with a ₹1.5 crore shortfall, highlighting the significant financial risk to beneficiaries.
Kaushik explained that the Married Women's Property Act (MWPA) of 1874 provides protection against debt attachment. Under Section 6 of the Act, a man can purchase a life insurance policy specifically for his wife and children, which is then regarded by law as a trust. As reported by Zee News, when a policy is under MWPA, it is no longer part of the deceased's estate and cannot be attached by courts for debt realization. Kaushik noted that 'The protection is absolute' and that opting for MWPA does not require higher premiums or additional costs.
According to the report, MWPA protection is available as a simple one-page addendum that can be filled out during the application process without additional cost. However, Kaushik warned that 'The vast majority of term plans are issued without it, leaving the payout vulnerable to every loan or credit line' the policyholder signed. He noted that an MWPA endorsement is irrevocable, meaning the policyholder cannot change beneficiaries later or surrender the policy for cash value without trustee consent.
