Thoughts on investing life insurance proceeds

by Manshu on February 6, 2012

in Investments

Mohan posted an excellent comment on the Suggest a Topic page the other day, and I’m reproducing it here.

Dear Manshu,

I read your blog before taking any financial decision and i thank you a lot as your blog has really educated me regarding the various financial products. Thanks a lot for your untiring work . However, of late, i have been thinking and worked out a way / plan for the financial benefits which are likely to be received against my policies, god forbid, if something happens to me during the tenure of these policies. I want some one/ some trusted agency/ to handle any benefits received from my policies and benefits given by my employer/ in a particular manner . Are there any such agencies? if not, what steps should i take to ensure that the funds received are deployed gainfully in fd’s/ MF’s etc, as my wife is a housewife and is not very knowledgable about financial products and she may have to take care of my 2 kids and my old mother.

If I understand this correctly, there are two concerns here – one is how do you ensure that your family gets all due benefits and then the second one is how do you ensure that the money is deployed gainfully.

This is a great thought, and while I hope none of us have to go through such an ordeal it’s wise to prepare for this.

I have never thought of this question deliberately till now so let me pen down my thoughts on how I’d like this to be handled and then I’m sure a lot of you will have great thoughts of your own on this too.

I must admit that no single person knows about all my investments and insurance but I think between my dad and wife – they will know all of them.

So, the first step should be to make sure that both of them know about everything and get a complete picture.

I think that’s the first step, to have someone you trust know about all your investments. If they don’t know about these investments, then there’s not much they can do beyond that.

The most practical way of doing this is create a list somewhere that’s easily accessible and can serve your purpose as well. I have a Google Spreadsheet which has these type of details and since it is a snapshot of what I own at what price – it’s very useful for me and I update it regularly. Sharing such a thing with my wife and dad will take care of the first thing.

The second step is to specify what should be done with each of the investments. So, if there are fixed deposits then let those fixed deposits mature, and if there are shares then sell off all those shares and get cash for them. This is probably a very uncomfortable thing to talk about and quite honestly I don’t see myself bringing up this conversation but it seems to be the right thing to do.

To claim all of this money – you would need paperwork and this brings me back to Bemoneyaware’s post on succession certificates and wills that I shared some time earlier.

Now, let’s come to the heart of the question which is if there is an agency or organization that handles this money on your behalf and which can invest it properly.

I don’t think there is anything like that at all. The closest I can think of is a financial planner, but I don’t think there is someone who specifically does this type of work only.

I think that if someone finds themselves in this unfortunate circumstance – they should go the ultra conservative and simple route of investing all their money in fixed deposits only.

It is easy enough to understand and administer and while there may be other products that give a higher yield – their complexity may make them unwieldy for someone not too familiar with financial products.

The other reason I say this is probably something a lot of you can very easily relate to and that’s the sad reality of the financial landscape.

A lot of people are out to screw you financially and invest your money for their selfish gains and not your benefit. Given that these type of people are a much larger proportion of the adviser / agent community – I feel that the chances to falling prey to one of these people is very high for someone who is not financially savvy and has no one to fall back on. Losing your loved one is a big enough tragedy and compounding that problem by investing precious little resources in crappy products is the worst that can happen to somebody.

In thinking about this I feel that the extra two or three percentages that someone can earn by investing in some other debt instrument is not worth the risk that comes with shopping for such products without having someone savvy to look out for your interests.

These are my thoughts on the subject – what do you think? Have I become too cynical or would you say the same thing?

{ 16 comments… read them below or add one }

Jitendra P.S.Solanki February 6, 2012 at 5:03 PM

Hi Manshu,

There has been many queries on the issue highlighted here.

In my views the best thing t do is involve your spouse in all your financial decisions,even if she is a housewife.A little awareness do wonders during crisis situations and spouse is the best person to share your finances.
Secondly list all your documents and make sure that your spouse is aware of. Apart from online you can also create offline and keep it along with all documents related to your finances. You should keep documents at a place where your spouse is well aware off.
Make sure you have created a nominee in all your investments so that the proceeds can be transferred without any difficulty.
A will writing can work good in transferring the assets to the person you desire.

If you have hired a financial planner then he is the third person who is well aware of your investments and hence is a good source to deal with such situation.

All in all without including your spouse or any other family member it is difficult because to transfer the proceeds one has to go physically to respective companies.Even if you hire a company a family member has to be well aware of all financials to deal with them.

Reply

Manshu February 6, 2012 at 7:38 PM

Involving your spouse in all decisions is a good idea that I hadn’t thought of. Thanks for bringing it up

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Jitendra Sachdeva February 6, 2012 at 5:27 PM

Another good article Manshu from our day to day things related to financial planning. Kudos to you 🙂

I always keep my wife and mom updated about what insurance products I own currently now. But they are not informed about what all I own in Demat format or things like Post office NSC etc. Another thing missing in the list is number of bank accounts I own due to job switch.

But it is very nice idea to keep all documents in hard copy as well and review the list once in every quarter.

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Manshu February 6, 2012 at 7:39 PM

Thanks! I think a lot of people will fall in the same situation that you are in. In fact I won’t be surprised to find some people who aren’t even fully aware of all the bank accounts they themselves hold.

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Ramesh February 6, 2012 at 9:38 PM

A very thoughtful blog. excellent.

yes FDs can be easily transferred to the nominees. but what is the procedure for transfer of mutual funds shares and bonds in a demat account (say Icicidirect) to a nominee? is it very complicated?

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Manshu February 7, 2012 at 6:40 AM

A friend had to do this recently and he said the process was simple enough – I don’t know details beyond that.

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bemoneyaware February 15, 2012 at 5:08 AM

No the process is not complicated. Transferring of stocks bought through icicidirect.com and mutual funds have separate process. The process of appointing a nominee for demat account is explained in my article How to nominate: Demat Account and PPF

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bemoneyaware February 6, 2012 at 10:30 PM

Good to see your post. I was having withdrawal symptoms 🙂
Very apt post and sadly very true. I have been witness to my relatives plight. To make sure that you they get their rightful please do the necessary paperwork. It is a gift for those you love Mohan.
Please update all your papers (joint ownership in anyone or survivor mode, nomination and then making of will). Please make your wife or your spouse informed at all times . You might find these posts helpful:
Right Paper Work For Those You Love: Part 1

For second part, organize your paperwork and make a list of where all the papers are. I had read a post on jagoinvestor about it. The link to pdf is Papers </a<

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Manshu February 7, 2012 at 6:38 AM

Appointing a nominee is important as you say in that article and recently someone surprised me by saying that a particular insurance / investment policy they were buying didn’t have the nominee facility. It seemed to me that they had not understood all the details. Have you ever heard of such a thing?

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bemoneyaware February 7, 2012 at 9:52 AM

No I haven’t heard about such a thing. Infact most of the forms now have an option which say something like customer has specifically said no to nomination. Nomination is being insisted even for non insurance as ET article IRDA directs motor insurance companies to ensure nomination papers are duly filled says. Maybe some details might help.

But I have not seen any bank or mutual fund or insurance guy explaining about filling the nomination ( which at times is assumed to be nomination not required)

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Ambarish Pathak February 7, 2012 at 3:36 PM

Most high end credit cards [platinum/signature] provide an insurance cover if you have bought airline tickets using the card. In case the person dies due to an air crash, the family can present a claim to the credit card company as well.

A very rare possibility, but considering that the cover is typically in crores [depending on your credit standing with the bank], it’s surely worth noting.

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Ramesh February 7, 2012 at 10:57 PM

Thanks Manshu for informing us that the process of transferring shares, mutual funds and Bonds in a Demat account to ones nominee is not very complicated.

It means one should not be afraid to keep long term investments for next generation in a demat account apart from good old Bank FDs!

Has any reader of wood-sculpture experienced a different scenario or is aware of the actual process?

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VikasG February 9, 2012 at 1:02 PM

I haven’t researched this much. How about we make all our investments through a trust? So, when the husband is alive, he does not make investments under his name or wife’s name. All investments like FDs/shares are done through a trust. Husband simply writes a will that trust assets should be split 50/25/25 between wife/parents/son or whatever they desire. Does this concept of trust exist in Indian law -maybe it goes by a different name.

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Manikaran Singal February 9, 2012 at 3:29 PM

Solution for this lies in proper estate planning. It actually happens that after the demise of the bread earner, when the insurance proceeds comes into the bank a/c of nominee, there’s lot many advisors comes into the scene. be it bank people, family “So-called Friends” etc. so its always better to make the adequate structure in your lifetime.

Write down a proper will and create a Trust under that with a write up of Trust deed . Select the person ( i m not aware of any agency) on whom you trust most and also who is financially literate. Or else you my select 2 or more persons for this requirement and appoint them as trustees for this. In trust deed you may also write the way these trustees should operate. Beneficiary will be the persons for whom you have created trust like in this case your wife and children. You may create 2 -3 seperate trusts with different benficiary, which is advisable from tax planning prespective.
In trust deed you specifically mention the way your life insurance proceeds should be used. If you already have a Financial plan in place, you may write the excerpts of your financial plan in that deed. This way your family members will be benefitted in 2 ways – One they gets the help of known and trusted expertise selected by you and other this will lessen the tax burden on family as the proceeds will go into trust and will be managed there. If there are seperate trusts then different tax files lead to more help in tax saving.
also it is advisable to act on Jitendra solanki’s advice as above, which applies to my view also.
@VikasG – There are various restrictions and tax implications on the creation and transferring of money into trust if one do in his lifetime. so in my view it is better to avoid. though there are some practical benefits also in some cases.

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Ramwsh February 15, 2012 at 4:51 PM

Thanks, Bemoneyaware.

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Madhu March 2, 2012 at 2:52 PM

Hi manshu, nice post.. whats your view on protection plans (term plans) ?
please share your view..
which are the best term plans in India… ?

Reply

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