Why the rich must make life insurance an integral part of estate planning

“I know these premiums would pinch us a bit, but both of us know that in case something happens to me in the next few years, our current savings are not enough to take care of Varun’s expenses for the rest of his life.” Madhavi could clearly recollect her late husband Rahul’s exact words while filling his life insurance claim form. Madhavi was glad that three years back she lost this argument and Rahul went on to buy this Rs 5 crore term plan. As a non-earning single parent of an autistic child, Madhavi knew how crucial these life insurance proceeds were going to be for planning Varun’s requirements, especially after her time. Just like in Madhavi’s case, life insurance can be a valuable element of an estate plan and can provide solutions to a wide range of objectives. Let’s look at some of them.

Immediate liquidity

On demise, the legatees may be required to obtain certain court orders such as probate, letter of administration or succession certificate to claim assets. Assuming no dispute amongst legatees, this may take up as much as a year and in case of any legal dispute, the wait can really be a long one. In the meantime, assets within the estate are locked up and cannot be accessed by your family. But, in the case of life insurance, the insurer, after some basic paperwork, would be able release the insurance proceeds to the nominee within few weeks and would not insist on any of the above-mentioned documents. This immediate tax-free liquidity from life insurance can be a major respite for your loved ones and can be used to meet immediate family expenses and pay off pressing debts.

Estate equalisation

Vivek Shah’s hotel business was almost 65 percent of his net worth; the rest of his assets, including a house, accounted for the remaining 35 percent. His elder son Kalpesh has already joined the business and would in all probability be his successor, while Jignesh, the younger one, has no interest in the family business and is a successful youtuber. Also, to make the things worse both the siblings are not in best of the terms. Shah decided to bequeath the hotel business to Kalpesh and the rest of the assets to Jignesh, but at the same time wanted to ensure an equal distribution between the two. His estate planner advised him to buy a whole life term plan with a cover equivalent to the differential value of the two dispositions and assign it to the younger son to offset the imbalance.

Ring fencing from personal liabilities

Generally, the liability of an individual is recoverable even after his/her death and, as per law, the estate will first have to pay off all the liabilities of the deceased before distributing to the legatees. But not many people know that there is provision in the Married Women Property Act. 1874 (MWP Act) which allows a married woman to protect her wealth from her relatives, creditors and even her own husband. The Section 6 of the MWP Act. covers life insurance plans if bought under this act. Any married man can take a life insurance policy in his own name under MWP Act. and making his wife and children as the beneficiary. The policy proceeds received under MWP Act. is protected from any claims by the creditors and it does not form part of the deceased’s estate.

Wealth enhancement

As you would observe in both the cases cited above in this article, there is substantial estate value enhancement through insurance proceeds. Hence, many a times high value insurance policies are bought with the objective of boosting the net worth of one’s estate. Apart from providing a large sum to the beneficiaries, the tax-free insurance proceeds can be utilised to fulfil certain other objectives like pursuing philanthropic desires of the deceased, providing for estate/inheritance tax if applicable, paying off liabilities or simply just as an asset-class diversification.

Life insurance and estate planning go hand-in-hand and complement each other very well. Because both involve planning for a situation where we would not be around to reap the benefits, it often remains neglected, and we keep procrastinating about them.