Question:
My name is Johnny. I’m currently married to Celine and together, we are blessed with Jack, our 5-year old son. I wish to continue to provide for my mother’s daily living expenses of RM 5,000 a month if I pass on prematurely. So, my question is this – Should I buy a life insurance policy with a sum assured of RM 1 million and have my mother nominated as the sole beneficiary?
Answer:
The answer is nope.
Unawarely, Johnny is setting his mother up for needless heartache and troubles if he chooses to do so, despite meaning well. The policy, which was intended to be a blessing to his mother, could turn out to be a curse. His mother could even be worse off financially, emotionally and mentally as a nominee of her son’s life insurance policy. Why?
Here, in this article, I’ll share how the RM 1 million is to be distributed if Johnny predeceases where his mother is nominated in his life insurance policy. Also, I’ll share a simple tool that Johnny could use to provide for his mother financially if he passes on prematurely.
How the Policy is a Curse to His Mother?
First, we need to understand the difference between a trust and a non-trust life insurance policy.
For instance, if Johnny had bought life insurance policies and has nominated his mother as his beneficiary before marrying Celine, his wife, these policies would be trust policies. If Johnny predeceases, his mother will collect her sum assured from these policies and is entitled to use them freely according to her wishes.
But, if Johnny buys a life insurance policy after being married to Celine, it would be a non-trust policy. If Johnny passes on, his mother, as a nominee, will collect the sum assured from Johnny’s insurer. However, she is not the sole beneficiary of the sum assured. His mother is required to act as an executor to the sum she received and have the money distributed to its rightful beneficiaries.
But, Isn’t His Mother the Beneficiary to Johnny’s Policy?
The answer is nope, despite being the sole nominee in the policy.
As the executor, upon collecting RM 1 million, his mother will first have to make settlement of all outstanding debt and taxes owed by Johnny to all his creditors and the government.
Subsequently, upon settlement of his debt and taxes, his mother could proceed with the distribution of the remaining sum assured, where the distribution is to be based on Johnny’s testacy status upon his passing.
If Johnny has a written will, the sum will be distributed according to his will. But if Johnny passes on without a will, the sum shall be distributed in accordance to the ratio of ¼ to Celine (spouse), ½ to Jack (issue), and ¼ to herself (parent). For instance, if the remaining sum, upon settlement of debt and taxes, amounts to RM 800,000, Johnny’s mother shall only inherit RM 200,000 from his policy. It is a far cry from the intended RM 1 million prepared for.
If Johnny’s mother, upon collecting RM 1 million, chooses to keep it or spend all of it without fulfilling her duties as the executor, she would face legal actions by Johnny’s creditors, the government and her own daughter-in-law. Hence, this is no laughing matter.
Being an Executor is No Easy Task!
And, this could be harder for Johnny’s mother, if she is not financially literate or physically fit.
Imagine this.
As the executor, Johnny’s mother will have lots to do. To name a few, it includes applying for a grant of probate or a letter of administration from the high court,
advertising to find Johnny’s creditors, visiting the tax department to find out his outstanding taxes owed and distribution of the sum assured accordingly.
Can you see that the whole process is a lot of legwork and paperwork?
Johnny’s mother could be burdened by the entire process, which possibly could take up to 1-2 years the fastest to complete. It could take much longer if Johnny passes on without a written will. In essence, it is a lot of effort from his mother to finally land herself her rightful inheritance of RM 200,000.
Okay, What’s the Solution?
Simple.
Johnny could form an insurance trust by following the steps below:
1. Johnny buys a life insurance policy with a sum assured of RM 1 million.
2. He assigns the policy to a trust.
3. The trust comes into effect if he passes on, or becomes comatose or disabled permanently.
4. In any of the events above, Johnny can instruct his trustee to make a periodic payment amounting to RM 5,000 a month to his mother.
5. Johnny can include an instruction to make the same periodic payments to his wife if Johnny’s mother passes on before the trust runs out of funds.
So, Why is This More Practical?
It is advisable for Johnny to set himself an insurance trust because:
1. The money is protected from Johnny’s creditors and the government.
2. Johnny’s mother shall be entitled to receive the full sum of RM 1 million.
3. The sum is paid from Johnny’s life insurer to his trustee. This avoids the issue arising from the money being stuck in Johnny’s bank account if he is to become mentally disabled or comatose.
4. The sum will be professionally managed by Johnny’s trustee, hence, reducing the risk of mismanagement of funds by his mother.
Conclusion:
In short, like Johnny, you could mean well by wanting to offer for your parents a financial safety net via life insurance policies. But, this could turn ugly if you are nominating your parents as ‘beneficiaries’ after you are married.
Perhaps, your situation is uniquely different and thus, requiring assistance from a qualified estate planner. If that is you, you may book yourself an appointment with our consultant by filling up the details below:
