Most people, especially family breadwinners, have life insurance policies. They assume that on their passing or if they are permanently disabled, the policy will pay out the sum insured that will take care of the financial needs of his family.
However, depending on the circumstances, things may not pan out as the policy holder intends. The following story about Sam highlights the different scenarios that may lead to unintended consequences, and offers the solutions to deal with it.
Hi, I’m Sam and I’m 43 years old. I’m happily married to Jenny, a 40-year old housewife and together, we are blessed with two children namely, Jim and Gina aged 6 and 3.
As I write, I wish to continue to provide for my family’s living expenses and pay for Jim and Gina’s tertiary education fees if I pass on prematurely. In view of this, I intend to buy a new life insurance policy where the sum assured is RM1 mil and nominate Jenny to be the sole beneficiary of my new policy.
With that being said, I have a few concerns. My question is: ‘Who would receive and manage the RM1 mil in sum assured if:
- I become comatose or mentally disabled?
- After my passing, my wife passes on before my children reach adulthood? Or,
- I pass on simultaneously with my wife due to an accident?
In Sam’s case, having a life insurance policy or a handful of them is a good start. The sum assured is helpful to his loved ones if he passes on prematurely as the money will be paid to his wife Jenny in a couple of weeks after Sam’s passing.
It is unlike Sam’s estate which may consist of cash, shares, and properties which will be frozen upon his death. It could take 1-5 years to unlock Sam’s estate and have them distributed to his beneficiaries, depending on his testacy status.
Here, I’ll list down possibilities of how his sum assured of RM1 mil could be received and used in the three scenarios above. More importantly, I’ll share a simple solution that Sam could use to be assured that his life insurance policy will be able to serve his intended objective.
For a start, most, if not all, life insurance policies will cover both death and total permanent disability (TPD). If Sam becomes comatose or mentally disabled due to an accident, his insurer will pay out the RM1 mil in sum assured to him.
But, is this RM1 mil collected helpful to his loved ones?
Well, it depends on the type of bank account his RM1 mil will be deposited into. First, if the RM1 mil is transferred into Sam’s personal savings account by his life insurer, who can have the access to his RM1 mil if Sam is the only person who has the username and password to his bank account?
Thus, his RM1 mil will be stuck and is of no immediate help to his family members.
Second, if the RM1 mil is banked into Sam’s joint account with Jenny, she will have full access to the money. So, is this problem solved? Well, I don’t think so because Jenny could be prone to mismanaging the money.
This could be due to a variety of factors ranging from overspending, to being conned by swindlers and failures in business ventures and investments. But then, Sam could place great confidence in Jenny’s ability to manage his finances.
If that’s the case, will it solve the issue? In a way, the answer is yes but it’s only if Jenny remains alive on planet earth. If not, this would lead us to:
It is possible for Jenny to pass on before their children reach adulthood, and this is after Sam’s demise. In this scenario, Jenny’s balance sum from the RM1 mil given would form a part of her estate and be distributed based on her testacy status.
If she has a written will, the balance sum would then be distributed to her beneficiaries accordingly by her executor.
Otherwise, without a will, the sum shall be allocated based on the ratio of ⅔ to Jim and Gina and the remaining ⅓ to Jenny’s surviving parents as mentioned in the Distribution Act 1958. If Jenny has no surviving parents, then, the sum shall be allocated to her children in full.
Here is a question. How will Jim and Gina collect their sum allocated, if they are below 18 years old?
The answer: Jim and Gina must have a trustee to help them collect the money and manage it on their behalf until they reach, at least, 18 years old.
This leads us to another question: ‘Who shall be their trustee?’
Will it be one of Jim and Gina’s uncles or aunties from either their paternal or maternal side or both? This could potentially result in conflict and strife among Jim and Gina’s relatives, which leads to more financial uncertainties to them.
The RM1 mil in sum assured will form part of Sam’s estate. Thus, the sum is to be distributed based on Sam’s testacy status, which is similar to what we had discussed above in Scenario 2. But here, it is common for a husband like Sam to have elected Jenny to be the sole executor of his will.
Hence, in the absence of a written will or a will without an appointed substitute executor, the question of ‘Who shall be their trustee?’ remains. The siblings’ relatives (both paternal and maternal) may contest to be their trustee, which can result in financial uncertainties for both Jim and Gina as mentioned earlier.
First, the RM1 mil in sum assured shall be kept with Sam’s insurer for a period of 12 months until a trustee to Jim and Gina has been appointed.
Let’s say, Jim and Gina’s relatives could not come into consensus on who should be their trustee after 12 months of their parents’ passing. In this case, the RM1 mil in sum assured will then be transferred from Sam’s insurer to a public trustee, namely Amanahraya Trustees Bhd.
The money shall be kept until Jim and Gina reach 18 years old, the age when both of them are eligible to receive their rightful inheritance. However, this would lead to three common issues for both Jim and Gina as listed below:
- Who shall fund Jim and Gina’s daily living expenses before they hit 18?
- Would Jim and Gina be aware of their inheritance when they hit 18?
- If they do, how will they manage their inheritance after receiving theirs?
Hence, having a life insurance policy alone is insufficient to offer assurance that the money provided for will eventually fulfill Sam’s intended purposes. As such, what then is his solution?
The answer is for Sam to set up an insurance trust.
So, what is it?
For a start, it is the use of both a life insurance policy and a trust to manage the sum assured based on Sam’s intentions upon occurrence of events stipulated in his trust document. Here is how it works;
a. Sam buys a life insurance policy where his sum assured is RM1 mil.
b. He assigns his policy to his trust instead of nominating Jenny as a beneficiary.
c. Then, Sam may elect Jenny, Jim and Gina to be beneficiaries of his trust.
d. Sam may dictate how and when the RM1 mil would be distributed to his beneficiaries. For instance, he may instruct the trustee to distribute the sum in the event of his passing on or him becoming permanently disabled according to the following proportions:
First, if Sam becomes permanently disabled, his insurer will pay RM1 mil to his trustee. Thus, the sum will not be stuck in his personal savings account.
Second, the trustee is to manage the sum based on Sam’s intentions with professionalism and integrity. Thus, the trustee is not permitted to use the sum to invest in stocks, real estate, or new business ventures if it is not instructed by Sam beforehand. This helps to reduce the risk of his funds being mismanaged.
Third, if Jenny passes on prematurely, Sam may include one additional clause in his trust where it allows his trustee to distribute the money directly to both Jim and Gina. As such, this would assure Sam that his children will be taken care of financially if he and his wife pass on prematurely.
Perhaps your situation is uniquely different and thus requires assistance from a qualified estate planner.
About the author
Jocelline Chee is the founder of WG Legacy, a leading professional estate planning firm. You can download a Strategy Report at wglegacy.com/report to find out how she preserved her family’s financial future via a combination of insurance, will and trust and how you can do the same for your loved ones too.