My name is Bill. I have been happily married with Candy since 2017. Presently, I have two life insurance policies where I named my parents to be beneficiaries of my policies. The details of the two policies are as follow:
Hence, my question is: ‘Will my parents inherit RM 600,000 from the policies if I pass on prematurely?
If Bill passes on, his parents will receive RM 600,000 from Bill’s life insurers, A Ltd and G Ltd. But, they are not free to use the full sum for their own benefit. In this article, I’ll be sharing how the RM 600,000 will be distributed in accordance with the Financial Services Act 2013 and the Distribution Act 1958.
Policy 1 – A Ltd
Bill bought this policy before his marriage and thus, is a trust policy. Hence, his parents will be rightful beneficiaries of its sum assured as the amount would be fully protected from Bill’s creditors. Thus, his parents may use the RM 100,000 freely as they wish.
Policy 2 – G Ltd
Bill bought this policy after his marriage. Policy 2 is a non-trust policy as he did not nominate his spouse or children, if any, as his beneficiaries. His parents, the nominated beneficiaries, shall receive the sum assured instead as its executors.
First, the RM 500,000 collected shall be used to settle all outstanding debts and tax liabilities owed by Bill to all of his creditors and the Malaysian government. Subsequently, the remaining sum would then only be distributed in accordance to his testacy status upon his passing.
For instance, if Bill passes on testate (with a will), the remaining sum would be distributed to beneficiaries stated in his will accordingly. However, if his parents are not stated in the will to inherit from Policy 2, they are required to transfer it to his beneficiaries stated in the will, thus, will not inherit his sum assured.
Alternatively, if Bill passes on intestate (without a will), the remaining sum will be distributed in accordance to the formula below:
In Bill’s case, assuming he has no children, half of his remaining sum assured is to be distributed to Candy. The remaining half shall be distributed to his parents equally. In both cases, testate or intestate, it may defeat the intended objective of Bill when he purchases Policy 2 which could be to provide an additional RM 500,000 in living expenses to his parents in their golden years.
Unless Bill has done this …
The above will not apply if Bill assigns Policy 2 to his parents.
If Policy 2 is assigned to his parents, its ownership shall be belonging effectively to his parents if Bill transfers Policy 2 via absolute assignment. Hence, if Bill is to pass on prematurely, the full sum assured of RM 500,000 would be inherited by his parents as they do not fall a part of Bill’s estate. The RM 500,000 is fully protected from Bill’s creditors. Inclusive of Policy 1, Bill’s parents shall inherit the RM 600,000 in total sum assured from Bill’s two life insurance policies.
Also, it helps Bill’s parents to avoid potential conflicts and legal disputes which could arise from unintended illegal use of sums assured collected from Policy 2. If Bill’s parents believe that the RM 500,000 received from Policy 2 is rightfully theirs and they use it without settling debts and tax liabilities owed by Bill and distributing it to the rightful beneficiaries, they may be sued by Bill’s creditors, the government, and even Candy, their daughter-in-law for her share in the sum assured. Instead of a blessing, Policy 2 could turn out to be a nightmare to both of his parents if they are unaware of their responsibilities.
Have Insurance, No Assurance?
Today, I’m sure most of us would have, at least, one life insurance policy. But, as a policyholder, the question we need to ask is if the policy or policies purchased can fulfill its or their intended purposes. This requires us to reflect what is to us important in life and how much is needed to offer adequate assurance in terms of finances to our loved ones. As such, it would be helpful to keep in touch with our insurance agents and estate planners so that our objectives will be aligned in accordance to our current wishes.