How do you ensure that when you are comatose or temporarily permanently disabled (TPD), you are still well taken care of by the insurance proceeds that you have bought? How do you ensure that your children (if you have any) are protected in the unfortunate event of both you and your partner passing away in an accident? Not that we want any of these things to happen but it’s always good to be prepared for any kind of scenarios.
There are two ways to give out the death benefits of an insurance policy. One is you can do an insurance nomination. The insurance nomination normally is a lump sum payment paid out to the beneficiaries, but you have no control over how your beneficiaries are going to use it. The beneficiaries may just use the insurance money to buy items such as luxury items.
The second way is via an insurance trust. You are preserving the sum assured with a trust vehicle and you can have controlled payment through the beneficiaries.
Scenarios, Risk or Problems with Insurance Nomination
1. A lump sum nomination to your children and at that point your child is 18 years old and has just reached the maturity age to receive the money. Imagine your 18-year-old receives the RM1 million nomination paid-up, what do you think the first thing he will do? Maybe he will buy himself a sports car and go all out to enjoy his life.
2. Normally husbands would nominate their wife for the lump sum payment. This is not really a good idea. It is not that your wife is not a good wife. Your wife, having inherited the millions from the insurance money, might be targeted by bad people or friends who are only interested in your money.
3. Lump sum nomination to your husband. Your intention is to pass the lump sum to your husband so that he can take care of your two minor children. We cannot be 100% sure that he will not be targeted by the opposite sex or he will spend money on his new girlfriend. So right now your insurance money, which is supposed to be for your children, will end up being spent on your husband’s new girlfriend. Now, that is a real problem.
4. Let us say your present husband has a very bad habit of drinking or gambling and he is not a good husband. In your insurance nomination, you leave out your husband and nominate your younger children. When the insurance is paid out eventually, the children are still minors, it will still go to the spouse because he is the legal guardian.
5. If you have an illegitimate child or family, it also does not guarantee that the benefits will be paid to the intended beneficiaries because they are not protected under Section 166 of the Insurance Act. This is the problem with insurance nomination.
We are not saying that insurance nomination is not good but just that these are the risks if you just do insurance nomination itself. Nomination covers only certain scenarios but it does not cover more “what-ifs” scenarios mentioned above.
Both Husband and Wife Pass Away in A Common Accident and Your Insurance Nomination Failed
This is the normal case. The wife will nominate 100% to the husband and the husband will nominate 100% to the wife in the insurance policy but what if both pass away in an accident? The insurance nomination fails in this instance and it does not provide for the substitution of beneficiaries. How do you protect your minor children then?
If you have no will, you need to go through the letter of administration procedure. If there is a will, you need to go through the probate process. These processes normally take some time. Without a will, it takes two to five years, with a will within two years.
When the children are still minors, they still need to carry on with their lives and education. The assets need to go through these procedures before they are distributed to the children. This will take quite a long time.
For total peace of mind, it is best to combine the best of both worlds. Insurance is a very good protection product but if you do just insurance nomination, it will only solve 50% of the scenarios where nothing happens when you pass to your wife, who is financially capable to handle the financial estate and ensure that the family will be brought up.
However, there are also other risks involved like what if something happens to your spouse when your children are still minor and your insurance money is parked under your spouse. In order to have total peace of mind and 101% protection, you should consider setting up an insurance trust.
Insurance nomination, because of its lump sum payment, will expose you to certain potential risks and problems that I have mentioned.
In insurance trust, because of its controlled payment, you can mention under what circumstances you want the money to be paid out. If your children want to buy a sports car, the trust will not give them the money. If the children want to pay for their college education fee, then the trust will only give out the money. It actually lessens the risks and problems of the money not being served in the intended purpose of the parents.
The people and terms used in the insurance trust include the settler, which is the owner; the beneficiaries, which are the internal beneficiaries of your choice; the trust asset, which is the insurance policy and the trust period, that is, how long you want the trust to go on.
The protector is very important, we always advise our clients to nominate a protector to act as a watchdog and advise the trustee on the needs of the beneficiaries.
With the insurance trust, actually the money can be given to you and your beneficiaries quickly because the insurance money is to be paid out for death claims but what if you are comatose or TPD. If you are comatose, the insurance money is sort of stuck. How do you ensure that although you are comatose or TPD, you are still well taken care of by the insurance that you have bought initially?
With the insurance trust, you decide when to give, how much to give and who to give to. You have control over all these three factors. There is no court order required for distribution. Meaning if you set up an insurance trust, once the insurance money is paid out to the trust, the beneficiaries can start benefiting from it. You do not need to go through the probate process.
What You Should Write in Your Trust Deed?
This is how you can control the usage of insurance money. With this insurance trust deed, you can say, “I will only pay for my child’s education and it will be paid directly to the university or college.
For your children’s maintenance, you can mention “X amount per month per child inflation adjusted”. Let us say RM2,000 a month per child’s maintenance and living expenses. If they have any medical needs, they can also get from this trust.
Next, in the trust deed, you can also mention “Settle outstanding debts or continue to pay monthly amounts”. For example, you have a housing loan. You set it in the trust to say, “Pay a minimum loan amount every month in the event if you do not have Mortgage Reducing Term Assurance. You can use part of the money to begin the probate process, which also requires some money. These are some of the things that you can state in your trust deed.
There is still somewhat a huge misconception about trust. A trust is not only for rich people, but it is also for those who have medium income. For those who have very little assets, “Do you have young children who will need immediate income when you and your spouse are not around? If the answer is yes, then you need to set up a trust.
The next question is “Can you afford to set up a trust? If you do not have lots of cash, would you be able to buy an insurance policy? Or do you have an existing policy that has a reasonably substantial amount to be put into the trust?
If the answer is yes, the trust that you do does not have to be a long term trust. Having a short term one should work just fine. You probably need trust coverage for your children until your youngest is 21 years old. In case you pass away before your child is 21, you are assured that there will be money available for your children.
In the event you live longer than your child who is 21, the trust will automatically lapse by itself. The trustee will assign back to you the policy and can nominate your children, who are adults and not too financially dependent on their parents.
So, there you have it! All the basic things that we think you should know before you decide to get an insurance policy of your own or for your family. Make sure you read through the fine lines of your insurance policy and do not just simply agree, sign and purchase. It’s better to be safe than sorry.
Edited by: Farah Alya Faisal
This article was first published on 20 December 2017
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