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IC33 English Chapter 9 Notes

Chapter 9 – Application of Life Insurance

  • Life insurance does not merely seek to protect individuals from premature death. It has other applications as well. It can be applied to the creation of trusts with resultant insurance benefits; it can be applied for creating a policy covering key personnel of industries and also for redeeming mortgages.
  • Married Women’s Property Act
  • Section 6 of the Married Women’s Property Act, 1874 provides for security of benefits under a life insurance policy to the wife and children. Section 6 of the Married Women’s Property Act, 1874 also provides for creation of a Trust.
  • It lays down that 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 of his wife and children, or any of them, shall ensure and be deemed to be a trust for the benefit of his wife, or of his wife and children, or any of them, according to the interest so expressed, and shall not, so long any object of the trust remains, be subject to the control of the husband, or to his creditors, or form part of his estate.
  • Each policy will remain a separate Trust. Either the wife or child (over 18 years of age) can be a trustee.
  • The policy shall be beyond the control of court attachments, creditors and even the life assured.
  • The claim money shall be paid to the trustees.
  • The policy cannot be surrendered and neither nomination nor assignment is allowed.
  • It is important to appoint a trustee for administration of the Trust property, being the benefits under the life policy. By creating a Trust to hold the insurance policies, the policyholder gives up his rights under the policy and upon the death of the life insured. The trustee invests the insurance proceeds and administers the Trust for one or more beneficiaries.
  • Term life insurance policy purchased under Section 6 of MWP Act is beyond the reach of court attachments and creditors.
  • Key man Insurance: An insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of an important member of the business.
  • The policy’s term does not extend beyond the period of the key person’s usefulness to the business.
  • Key man insurance policies are usually owned by the business and the aim is to compensate the business for losses incurred with the loss of a key income generator and facilitate business continuity.
  • Keyman insurance does not indemnify the actual losses incurred but compensates with a fixed monetary sum as specified on the insurance policy.
  • Keyman is a term insurance policy where the sum assured is linked to the profitability of the company rather than the key person’s own income.
  • A key person can be anyone directly associated with the business whose loss can cause financial strain to the business. For example, the person could be a director of the company, a partner or someone with specific skills or knowledge which is especially valuable to the company.
  • Mortgage Redemption Insurance (MRI) :
  • It is an insurance policy that provides financial protection for home loan borrowers.
  • It is basically a decreasing term life insurance policy taken by a mortgagor to repay the balance on a mortgage loan if he/she dies before its full repayment.
  • It can be called a loan protector policy.
  • This plan is suitable for elderly people whose dependents may need assistance in clearing their debts in case of the unexpected demise of the policyholder.
  • The policy bears on surrender value or maturity benefits. The insurance cover under this policy decreases each year unlike a term insurance policy where insurance cover is constant during the policy period.