You may have heard of insurance trust before but may not know how it actually works. You probably have also wondered if it’s any different than an insurance policy and whether it is as important as an insurance policy.
Well, do you know that having an insurance trust is one of the best ways to protect your family’s future in the event of your death? Did you know that through insurance trust, you will be able to manage the way your beneficiaries receive their inheritance and you’ll also have control over who you leave your assets to once you’re no longer around?
We asked Mr. Azhar Hew, Group CEO of Rockwills International Berhad, to shed light on these 10 burning questions that you may want to ask an insurance trust expert if you ever met one.
1. How does insurance trust work?
Insurance trust as the name indicates is a trust where life insurance is placed as the asset of the trust. The creator of the trust, called the settlor, transfers the life insurance policy to a trustee and gives written instructions to the trustee.
So, insurance trust is a legal arrangement between the settlor and the trustee where written instructions are given to the trustee on how to use the insurance money for the settlor’s beneficiaries in the future when something unfortunate happens to the settlor.
As the trustee needs to outlive the settlor and survive the duration of the trust to be able to distribute to the beneficiaries as instructed, it only makes sense if the trustee is a trust company, like Rockwills Trustee Berhad, rather than an individual who may misuse funds, fall ill, lose interest or depart.
2. What are the benefits of insurance trust?
When an insurance trust is set up, the settlor will have peace of mind because of the following reasons:
a) The settlor as the sole beneficiary of his own trust can instruct the trustee to withdraw funds from the insurance policy for his emergency use even before his death or disability. As such, the settlor retains control of the policy through the trustee at all times while he is alive.
b) If the settlor suffers from a major illness or disability where the insurance proceeds can be claimed, the trustee can use the insurance proceeds to benefit the settlor solely or to benefit the settlor and his family as beneficiaries.
If there is no insurance trust at a time when the settlor is in a coma or when he is paralyzed, any claim by the next of kin would be payable to the settlor himself, not the insurance nominees. This means the settlor and his family will have difficulty accessing the insurance proceeds deposited in the bank account of the settlor.
With an insurance trust, the trustee will claim the insurance money for it to be readily used for the settlor and/or his family.
c) When death happens to the settlor, the insurance money will be available to be used for the beneficiaries quickly as there is no need to obtain any court order such as Probate.
If any of the beneficiaries named in the trust does not survive the settlor, the trust would already name substitute beneficiaries to be received in place of the deceased beneficiary.
Without an insurance trust, it is not possible to do so with an insurance nomination.
d) The standard of living of the beneficiaries will be maintained in the future as the insurance money will be claimed quickly by the trustee preventing any serious disruption to the financial needs of the beneficiaries. This is possible because the insurance trust need not obtain Probate.
e) With an insurance trust, the settlor will have an assurance that the monies will not be squandered, or the beneficiaries being cheated. This is because the settlor can state the conditions for distribution to them.
Without an insurance trust, the insurance proceeds will be distributed to the beneficiaries in a lump sum without any control over its usage, and beneficiaries as young as 18 years old will be entitled to the entire amount.
3. How does an insurance policy offer financial reassurance to my loved ones if something were to happen to me?
When a trust is well funded, the trustee can easily carry out all the instructions of the settlor providing financial stability to the beneficiaries.
As the trust is usually designed to provide long-term financial stability to the beneficiaries, life insurance becomes an integral part of the trust planning. This is because the large payout from the insurance policy upon death or disability of the settlor will be used by the trustee to pay the beneficiaries an allowance as well as pay for their education and medical expenses giving them financial security.
4. How to identify the right insurance policy for me and my current financial situation?
For the purposes of using the insurance policy as an asset in the trust, you should choose an insurance policy plan that is:
a) affordable in terms of premium payment, and
b) the insurance sum assured should be of the right amount for your beneficiaries. Where the insurance policy is a no-frills type of policy covering just death or disability, the insurance premium would become more affordable.
Often investment-linked policies are used for an insurance trust as it is affordable and it provides the settlor with investment returns that he may want to utilize in the future.
In any event, it is important to speak to an insurance expert who may be a professional estate planner for the right type of insurance to be part of your insurance trust.
5. How do I know if I need to have an insurance trust or not?
Generally, it will be essential for you to have an insurance trust when:
a) You are married and have young children who rely on you financially; or
b) You are a single parent with young children; or
c) You are an only child and your aged parents are staying with you and you have concerns about their wellbeing in case you pass on before them or become disabled; or
d) You have more than one family where you would want to provide for both families without the families getting into a fight in the future; or
e) You have dependents such as your nephew or nieces in your care. When you have loved ones who are relying on you, it becomes essential to have an insurance trust. With the pandemic, it is even more important to ensure that you have an insurance trust set up in addition to having a Will done.
6. Who can be beneficiaries of the trust and can the beneficiaries be changed?
The settlor can name any person, whether he/she is a Muslim or not, or name any organization as beneficiary.
One of the advantages of having an insurance trust is that it allows the settlor to name substitute beneficiaries in case any of the beneficiaries pass on before the settlor.
A well-drafted insurance trust would also allow the settlor to amend the terms of the trust, from time to time to cater to the ever-changing needs of the beneficiaries. The changes can range from adding or removing beneficiaries from the trust, increasing or decreasing the portions there are entitled to or to add new conditions for distribution.
7. Can I control how I want my insurance trust to be disbursed?
Yes, you can as the insurance trust distribution is based on your instructions and it should be customized to relieve you of any financial concerns you have for your family when you are no longer around.
Every two to three years, you should review the instructions you wrote in your insurance trust. This is to ensure that the persons you want to benefit are included as beneficiaries.
If you no longer want a person to be a beneficiary, you can remove him/her from the trust. At the same time, you may want to review the amount payable to them as well as check whether conditions that you imposed earlier are still relevant.
Where there are increases in expenditure for the beneficiaries, the amount of money payable from the insurance policy requires a review as well. This may involve purchasing an additional insurance policy to be part of the existing insurance trust.
There are many other matters to consider when you do a review of your insurance trust, so engaging a professional estate planner is important to help you achieve this.
8. If my spouse is the sole nominee to my insurance policy, what happens to the insurance proceeds upon my spouse’s passing?
Under Paragraph 5 in Schedule 10 of the Financial Services Act 2013, the nomination to your spouse would be a trust policy. This means upon your passing, she will receive the proceeds as a beneficiary and the proceeds will not become part of your estate.
As a result, the creditors of your estate will not be able to claim the proceeds from your spouse. The same result will be achieved when you have an insurance trust as you would have transferred the ownership of your insurance policy to the trustee.
If your spouse survives you to claim the insurance money but passes on after that, the proceeds will become part of her estate.
If you have young children, they will have to wait for years especially if your spouse died intestate. However, with an insurance trust, this disastrous outcome can be easily avoided. This is because the death of your spouse will not affect the portion of the insurance money reserved in the trust for your children.
If your spouse predeceases you, your nomination would have failed, and the insurance money will become part of your estate. It will be subjected to the probate process including using the proceeds to pay your debts and liabilities before your children receive any of its balance. This can take years especially when you die intestate.
Again, having an insurance trust would prevent such an outcome.
9. If my young children are nominees, who should claim the insurance proceeds for them in the event both me and my spouse are unable to?
If your children are below 18 and they are named as nominees in your insurance policy, under Paragraph 5 in Schedule 10 of the Financial Services Act 2013, it would be a trust policy. However, as they are below 18, they will not be able to claim the insurance money.
Under Paragraph 5 in Schedule 10, in absence of any appointed trustee in the insurance policy, the insurance company will pay such insurance money to Amanah Raya Berhad (ARB) as the trustee.
ARB will hold the money for them until they are 18 years old.
The question is – at such a young age, will your children be able to preserve the money for their future or will they be cheated? If you do want financial stability and security for your children, having an insurance trust for them will become crucial.
10. Do I still need an insurance trust if I have already made a will?
Yes, especially when you have minor children and/or aged parents to care for. Therefore, it is essential to have an insurance trust in addition to your Will to protect your loved ones.
This is because your Will only can be used when you pass on and thereafter probate is required for your executor to collect your assets for it to be used to pay off your debts and liabilities.
Only if there is any asset left, can your executor distribute it to your beneficiaries named in your Will. This can take months and sometimes years. In the meantime, your beneficiaries will not be receiving any money to pay for their daily needs for maintenance, education, and medical.
If you had set up an insurance trust, the insurance money will be readily available to be used by the trustee to begin distribution once the claim is approved by the insurance company. This usually takes only a few weeks, rather than months or years.
Edited by: Farah Alya Faisal