Question:
Hi, I’m Sam and I’m 43 years old. I’m happily married with Jenny, my wife who is a 40-year old housewife and together, we are blessed with two children namely, Jim and Gina aged 6 and 3 today.
As I write, I wish to continue to provide for my family’s living expenses and to be able to 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 RM 1 million 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 RM 1 million in sum assured if:
a. I become comatose or mentally disabled?
b. After my passing, my wife passes on before my children reach adulthood? Or,
c. I pass on simultaneously with my wife due to an accident?
Answer:
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 for the money will be paid to Jenny, his wife in a couple of weeks after Sam’s passing. It is unlike Sam’s estate which may consist of cash, shares, and properties for they 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 RM 1 million could be received and used in the three scenarios above and 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, if needed to.
Scenario 1: Sam becomes Comatose or Permanently Disabled
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 RM 1 million in sum assured to him.
But, is this RM 1 million collected helpful to his loved ones?
Well, it depends on the type of bank account his RM 1 million will be deposited into. First, if the RM 1 million is transferred into Sam’s personal savings account by his life insurer, who can have the access to his RM 1 million if Sam is the only person who has the username and password to his bank account? Thus, his RM 1 million will be stuck and is of no immediate help to his family members.
Second, if the RM 1 million is banked into Sam’s joint account with Jenny, Jenny 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 to 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 is only if Jenny remains alive on planet earth. If not, this would lead us to:
Scenario 2: Jenny Passes On Before Jim and Gina Reach Adulthood
It is possible for Jenny to pass on before their children reach adulthood and this is after Sam’s passing. In this case, her balance sum from the RM 1 million given would form a part of Jenny’s estate and will be distributed based on her testacy status. If Jenny 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 behalf of them 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.
Scenario 3: Sam and Jenny Pass On Simultaneously
The RM 1 million 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 sibling’s relatives of their paternal and maternal may contest to be their trustee, which can result in
financial uncertainties for both Jim and Gina as mentioned earlier.
What if There is No Trustee for Jim and Gina?
First, the RM 1 million in sum assured shall be kept within 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 RM 1 million 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. Hence, this would lead to three common issues for both Jim and Gina as listed below:
a. Who shall fund Jim and Gina’s daily living expenses before they hit 18?
b. Would Jim and Gina be aware of their inheritance when they hit 18?
c. If they do, how will they manage their inheritance after receiving theirs?
How to Futureproof Your Family’s Financial Future with an Insurance Trust?
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 RM 1 million.
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 RM 1 million 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:
How does it solve issues arising from the scenarios above?
First, if Sam becomes permanently disabled, his insurer will pay RM 1 million to his trustee. Thus, the sum will not be stuck in his personal savings account.
Second, the trustee is to manage the sum given 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.
Conclusion:
In short, insurance trust is a useful vehicle to ensure that the sum assured of an insurance policy is being managed based on the life insured’s purposes. Thus, it offers a more comprehensive assurance to the policyholder.
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