 "Ensure policy proceeds reach the right person")
Sahil Sharma, on one hand, is pleased that he survived the Kashmir floods. But, on the other, he is worried that if anything had happened to him, his family would have found themselves in a financial mess. When he visited an insurance company's office, he was given multiple choices of plans - endowment plans, immediate annuity, child plans, pension plan, and one particular plan which distributed the life insurance proceeds in installments.
The problem
The plans did not convince Sharma that the money would be used in the way he wanted - a genuine concern. Ensuring proper distribution and usage of life insurance proceeds is a very genuine concern. However, the answer to this apprehension does not lie in only buying insurance products. Sharma wasn't able to find a solution to his queries as he was approaching an insurance agent for solutions that were way beyond his scope. An insurance agent, at best, can give a proper insurance plan. But he/she cannot ensure that the insurance proceeds are used in a particular way. That comes under estate planning. He actually needs a financial planner to answer his doubts.
Adequate coverage
Financial planning is a wide concept and not limited to making investments or buying insurance as it is popularly known. The answer to Sharma's query can be achieved by properly allocating funds for various goals. First, one needs to understand the importance of adequate insurance coverage. It's not just about having an endowment or unit-linked insurance plan with coverage of 10-15 times of annual income. Neither is it about buying child insurance policies with some income protection cover. It's about providing for all his financial responsibilities like children's education, marriage, spouse's day-to-day expenses and lifestyle, loans, parents well being, etc. For all this, there has to be detailed and satisfactory calculation put in place which will further guide him towards the solutions he is seeking.
Proper nomination
While buying insurance policy, he should make sure that there is proper nomination. There is a provision to have multiple nominees in a life insurance policy. Make nominations, according to the insurance plan and calculations. For instance, if he wants to provide Rs 20 lakh for his children's education through Rs 2 crore of insurance policy, then it is better to nominate each child for 10 per cent of sum assured. This will help in two ways. One, the money gets earmarked for a particular goal. Two, this will create a separate tax file in the name of child which will further help in tax planning. This step should be accompanied with writing of will with bequests aligned with the nominations.
Married Women's Property Act
An insurance policy can also be bought under Married Women's Property Act (MWP Act). This is generally advisable for businessmen whose business operations involve taking loans. In this kind of structure, lenders normally ask for collateral or some kind of security from the borrower. Often, the personal assets of the borrower get mortgaged in the process. Buying insurance policy under the MWP Act can secure the policy amount for the benefit of spouse and kids. In case of untimely death of the borrower, creditors/bankers recover the loan amount by selling the assets and other collaterals and there might be attachment of other assets of the borrower, as directed by judiciary. This could include proceeds of life insurance policies. But, if the Insurance policy was purchased under MWP Act, creditors cannot claim any amount from the policy proceeds and thus the claimed amount becomes available to the nominees.
Registering a policy under MWP Act is a very easy process. The proposer just has to fill up one separate form meant for this and submit it along with the Insurance proposal form. Do note that registration of a policy under MWP Act is possible only at the time of purchase of the policy and not at a later date.
Setting up a trust
Forming a trust and assigning the policy to trust can help. Typically, people stay away from forming trusts as it sounds like a very complicated process. However, it is not so. While forming a trust, one has to appoint a trustee and alternate trustee who look after the management of the trust money. That trustee can be the sponsor himself, one who has formed the trust and a professional on whom the sponsor has faith in, for the proficient management of money. Once a private trust formed, the life insurance policy money can be assigned to that private trust. The sponsor can specify the conditions for the trust money, on how this should be managed and also on trustees, to work in a specified manner.
Involve family members
The measures that are outlined above can ensure the proper distribution of the sum assured proceeds, but to ensure the proper usage of funds, the most important and easiest way is to involve family members in family financial decisions making. They should always be aware of your financial status. More importantly, the amounts or insurance or other assets you have. And of course, they should also know about your liabilities so that people do not cheat them. Share all the documents with them, in fact, they should have a copy of all critical documents.
They should be educated about the usage of funds whenever required. They should have the details of your financial planner, doctor, advocate, etc. Involve them in financial planning process. This will also help you in management of your finances during your lifetime, besides being confident that money will be used in the same way as you intended to after your demise.
The first step Sharma should take is to have a detailed financial plan, from an investment adviser registered with the Securities and Exchange Board of India. He should involve his wife in the whole process. The adviser will guide him on all his queries and how to work on it and then everything will fall in place.
Buying insurance, making investments or asset building is of no use until you ensure the proper distribution and usage of the same.
The problem
The plans did not convince Sharma that the money would be used in the way he wanted - a genuine concern. Ensuring proper distribution and usage of life insurance proceeds is a very genuine concern. However, the answer to this apprehension does not lie in only buying insurance products. Sharma wasn't able to find a solution to his queries as he was approaching an insurance agent for solutions that were way beyond his scope. An insurance agent, at best, can give a proper insurance plan. But he/she cannot ensure that the insurance proceeds are used in a particular way. That comes under estate planning. He actually needs a financial planner to answer his doubts.
Adequate coverage
Financial planning is a wide concept and not limited to making investments or buying insurance as it is popularly known. The answer to Sharma's query can be achieved by properly allocating funds for various goals. First, one needs to understand the importance of adequate insurance coverage. It's not just about having an endowment or unit-linked insurance plan with coverage of 10-15 times of annual income. Neither is it about buying child insurance policies with some income protection cover. It's about providing for all his financial responsibilities like children's education, marriage, spouse's day-to-day expenses and lifestyle, loans, parents well being, etc. For all this, there has to be detailed and satisfactory calculation put in place which will further guide him towards the solutions he is seeking.
Proper nomination
While buying insurance policy, he should make sure that there is proper nomination. There is a provision to have multiple nominees in a life insurance policy. Make nominations, according to the insurance plan and calculations. For instance, if he wants to provide Rs 20 lakh for his children's education through Rs 2 crore of insurance policy, then it is better to nominate each child for 10 per cent of sum assured. This will help in two ways. One, the money gets earmarked for a particular goal. Two, this will create a separate tax file in the name of child which will further help in tax planning. This step should be accompanied with writing of will with bequests aligned with the nominations.
Married Women's Property Act
An insurance policy can also be bought under Married Women's Property Act (MWP Act). This is generally advisable for businessmen whose business operations involve taking loans. In this kind of structure, lenders normally ask for collateral or some kind of security from the borrower. Often, the personal assets of the borrower get mortgaged in the process. Buying insurance policy under the MWP Act can secure the policy amount for the benefit of spouse and kids. In case of untimely death of the borrower, creditors/bankers recover the loan amount by selling the assets and other collaterals and there might be attachment of other assets of the borrower, as directed by judiciary. This could include proceeds of life insurance policies. But, if the Insurance policy was purchased under MWP Act, creditors cannot claim any amount from the policy proceeds and thus the claimed amount becomes available to the nominees.
Registering a policy under MWP Act is a very easy process. The proposer just has to fill up one separate form meant for this and submit it along with the Insurance proposal form. Do note that registration of a policy under MWP Act is possible only at the time of purchase of the policy and not at a later date.
Setting up a trust
Forming a trust and assigning the policy to trust can help. Typically, people stay away from forming trusts as it sounds like a very complicated process. However, it is not so. While forming a trust, one has to appoint a trustee and alternate trustee who look after the management of the trust money. That trustee can be the sponsor himself, one who has formed the trust and a professional on whom the sponsor has faith in, for the proficient management of money. Once a private trust formed, the life insurance policy money can be assigned to that private trust. The sponsor can specify the conditions for the trust money, on how this should be managed and also on trustees, to work in a specified manner.
Involve family members
The measures that are outlined above can ensure the proper distribution of the sum assured proceeds, but to ensure the proper usage of funds, the most important and easiest way is to involve family members in family financial decisions making. They should always be aware of your financial status. More importantly, the amounts or insurance or other assets you have. And of course, they should also know about your liabilities so that people do not cheat them. Share all the documents with them, in fact, they should have a copy of all critical documents.
They should be educated about the usage of funds whenever required. They should have the details of your financial planner, doctor, advocate, etc. Involve them in financial planning process. This will also help you in management of your finances during your lifetime, besides being confident that money will be used in the same way as you intended to after your demise.
The first step Sharma should take is to have a detailed financial plan, from an investment adviser registered with the Securities and Exchange Board of India. He should involve his wife in the whole process. The adviser will guide him on all his queries and how to work on it and then everything will fall in place.
Buying insurance, making investments or asset building is of no use until you ensure the proper distribution and usage of the same.
The author is a certified financial planner and founder, Good Moneying Financial Solutions