Inheritance Planning and Life Insurance: Two sides of the same coin

Untimely death is not only emotionally traumatic for any family but it creates a vacuum that is not easy to be filled. Losing someone no matter what time or age is always painful beyond words. We as Indians are emotionally bonded and hence every relationship for us speaks of unconditional love and affection.

During our journey at My Legacy Box, we have learnt more closely than ever before how painful and disturbing it can be, especially if we have dependents. When someone becomes the provider, he/she carries the ultimate responsibility for not only taking care of daily needs but also planning for the future. Planning for the future, especially when it comes to securing your family's financial well-being, is a task that requires careful thought and consideration. Two essential priorities usually stand out: ensuring that our loved ones are financially secure in any given circumstance and that the wealth we’ve worked hard to build is passed on according to our wishes. In India, inheritance planning and life insurance are two critical components of this process. However, they come with their legalities and regulations that must be understood to ensure that your plans are executed smoothly.

1. Understanding Inheritance Planning in the Indian Context

Inheritance planning, or estate planning, involves the distribution of assets according to your wishes after death. Having a clear inheritance plan is crucial in India, where family structures and property laws can be complex. Said that the process is governed by various succession laws, which depend on your religion and the type of property you own. By taking the time to plan now, you protect your family’s future and make the transition of your wealth smoother and stress-free.

2. Here is a summary of different Succession Laws in India

Many rules and laws also become applicable depending upon the native State in India, making the process more complex.

3. Joining Dots with Life Insurance planning

Life insurance planning involves choosing a policy that fits your needs and ensures your family is financially protected when you’re no longer around. The main goal of life insurance is to provide a lump sum of money, called a death benefit, to your beneficiaries after your death. This money can be used for anything from paying off debts and covering daily living expenses to funding your children’s education or preserving your business.

When done correctly, inheritance and life insurance planning can complement each other beautifully, creating a comprehensive strategy that ensures your family's financial stability and honors your wishes.

In a country like India, where the average family size is approx 4.8 and the earning member in a family is approx 1.2, we are still below 5% penetration when it comes to Life Insurance coverage.

“Given the above numbers, life insurance becomes all the more important.

Life insurance is primarily a contract for transferring the life risk of the earning member of a family to the insurer by paying a certain premium, wherein the insurer promises to pay an amount (sum assured) in case of the event of death of the policyholder during the policy term.

We already know that term insurance is the best form of life insurance for anyone.

People often ask me - term insurance sahi hai but agar mere koi dependents nahi hain toh kya phir bhi mujhe lena chahiye?

My reply to such questions is that it all depends on your life goals. But let me break it down for you - When you are 25, you won't have any dependents. But when you are 32, most likely you will have a wife, and a kid and it's important to protect them. And term insurance is a good way to do that. Also, buying term insurance at 25 will cost you cheaper than buying it at 30.

And most people make the same mistake of not buying it early. And when they think about buying it, when they're serious about it, they either have a lifestyle condition like diabetes or higher BMI, and they become costly for the insurance company to cover.

So boss, agar life ke roadmap pe dependents dikh rahe hai, toh term insurance le lo!

Aur kaunsa sahi hai, jaanne ke liye Talk to a qualified advisor.” Says Raj Ahuja, Turtle finance

3.1 Ensuring Financial Security for Dependents

One of the biggest benefits of life insurance is that it provides immediate financial support to your loved ones when they need it most. For example, if you're the primary breadwinner, your sudden absence could leave your family struggling to pay bills or maintain their lifestyle. Life insurance steps in to fill that gap.

While the distribution of your assets through a will or trust might take time due to legal processes like probate, life insurance benefits are typically paid out quickly and directly to the Nominees. This means that your family can have access to money right away, helping them cover immediate expenses such as funeral costs, Loan payments, and daily living expenses while they wait for the inheritance to be settled.

Rajesh, a Hindu, had a wife and two children. He also supported his elderly parents. Rajesh took out a term life insurance policy and named his wife as the nominee. Unfortunately, Rajesh passed away suddenly. While his family awaited the distribution of his other assets according to the Hindu Succession Act, the life insurance proceeds were quickly paid to his wife, helping her manage household expenses and care for their children and Rajesh’s parents.

3.2 Addressing the Complexity of Inheritance Laws

Indian succession laws can be complex, especially when it comes to intestate succession. For instance, under the Hindu Succession Act, ancestral property must be divided among legal heirs, which can lead to disputes. Life insurance can provide a way to ensure that specific wishes are fulfilled without being entangled in legal battles.

Anjali, a Christian woman, owned several properties and significant savings. She wanted to ensure that her daughter received a specific portion of her wealth, while the rest was distributed among her other relatives according to the Indian Succession Act. Anjali purchased a life insurance policy and named her daughter as the sole nominee. When Anjali passed away, her daughter received the insurance payout without any legal complications, while the rest of her estate was divided according to the will.

3.3 Minimizing Family Disputes

Inheritance disputes are common in India, particularly when a person dies without a will or when the will is contested. Life insurance can help minimize these disputes by providing a clear, uncontested source of funds for specific beneficiaries.

Mohammed, a Muslim man, had three sons and two daughters. According to Muslim Personal Law, his estate would be divided into specific shares among his heirs. To avoid potential conflicts, Mohammed purchased life insurance policies for each of his children, naming each as the nominee for a separate policy. This ensured that all his children received an equal share of his wealth, reducing the likelihood of disputes over the distribution of his estate.

3.4 Supporting Minor Children

Under Indian law, minor children cannot directly inherit property until they reach the age of majority. However, life insurance can be used to provide for their needs immediately after your death. The IRDAI allows for the nomination of a legal guardian who will manage the funds on behalf of the minor until they come of age.

Ravi and Priya, a married couple with two young children, both had life insurance policies. They named each other as the primary nominee and their children as contingent nominees. In their will, they appointed Priya’s brother as the legal guardian for their children in case something happened to both of them. When Ravi passed away in a tragic accident, the life insurance proceeds were used to support the children, with Priya’s brother managing the funds as the guardian.

3.5 Balancing the Interests of All Heirs

Indian families often have complex structures, with multiple generations and branches. Balancing the interests of all heirs can be challenging, especially when different types of assets are involved. Life insurance can help equalize inheritances, ensuring that each heir receives a fair share without liquidating valuable assets.

Sunil, a businessman from a joint Hindu family, had significant wealth tied up in real estate and business assets. He wanted to leave the business to his son, who had been involved in running it, while also providing for his daughter and grandchildren. Sunil used life insurance to ensure that his daughter and grandchildren received an equitable portion of his wealth without having to sell any business assets. The business was passed on to his son, while the life insurance proceeds provided financial security to the rest of the family.

4. Life Insurance planning should not be a standalone

We often make mistakes of having a single vision while selecting our life insurance plan. Either it is looked at as an investment or pension plan than a protection plan. Life insurance planning should not be viewed as a standalone process but rather as a part of a comprehensive financial plan. While life insurance provides a financial safety net for your loved ones in case of an untimely death, it works best when integrated with other essential aspects of inheritance management. A holistic approach ensures that not only are your family’s immediate needs covered, but their long-term financial well-being is also safeguarded.

Life insurance can help pay off loans, manage household expenses, and ensure children's education, but it should complement your savings, investments, and a well-thought-out estate plan. This ensures that your assets are passed on efficiently and tax-effectively, while life insurance helps cover any gaps. Instead of seeing it as just a policy, view life insurance as one piece of the larger puzzle that ensures your family’s financial security in both the short and long term.

5. Let’s go over the checklist

1. Familiarise yourself with the applicable Succession law. Consult a legal expert if needed for your requirement
2. Review your existing Life insurance policies
3. Create your Will or update it regularly
4. Consider the tax implication in the hand of beneficiaries
5. Speak and identify a second in command for your Will & policies safekeeping

Every family’s situation is unique, and so is every financial plan. Whether you’re dealing with the intricacies of Hindu succession law, Muslim personal law, or any other framework, integrating life insurance into your inheritance planning can provide peace of mind and financial stability for your loved ones. Start the conversation today, seek the right advice, and take proactive steps to protect what matters most.