How to ensure that although you’re comatose or TPD, you’re still well taken care of by the insurance proceeds that you bought initially ? How to ensure that the children are protected in case both Husband & Wife passes away in a common accident ?
In this issue, I’m sharing more about Insurance Trust.
We have two types of ways to give out the death benefits of an Insurance policy. One is you can do Insurance Nomination. The insurance nomination normally is a lump-sum payment paid out to the beneficiaries but after that you cannot control how your beneficiaries are going to use it. The beneficiaries may just use the insurance money and do something else. They might buy luxury items. The second way is via an Insurance Trust, you’re preserving the sum assured with a trust vehicle, and you can have controlled payment through the beneficiaries.
Here are some scenarios, risk or problems with Insurance Nomination.
1. A lump-sum nomination to your children and at that point the children is 18 years old, just reached the maturity age to receive the money. Imagine when the 18 years old child receives the RM1 million nomination paid-up, what you think the first thing he will do? Maybe the first thing he will do is buy himself a sports car and go all out to enjoy his life.
2. Normally the husbands nominate their wife for the lump-sum payment. Is not that your wife is not a good wife. However, we never know because the society has changed and your wife having inherited the millions from the insurance money, they will be targeted by bad people or bad friends that are only interested in your money. It might happen and it will expose to that risk.
3. Lump-sum nomination to your husband. Your intention is to pass the lump-sum to your husband so that your husband can take care of your two minor children. We won’t be 100% sure that he will be targeted by girls or he will spend money on her new girlfriend. So right now your insurance money which supposed for your children, ended up spending it on your husband’s new girlfriend. Now, that’s a REAL problem.
4. Let’s say the present husband has a very bad habit of drinking or gambling, not a good husband. Your insurance nomination, you leave out your husband said I don’t want to nominate my husband, I nominate my younger children. But actually when the insurance is paid out eventually, the children are still minor, it will still go back to the spouse because he is the legal guardian, and this is the husband who loves gambling or drinking.
5. If you have an illegitimate child or family, it also doesn’t guarantee the benefits paid to the intended beneficiaries because they are not protected under Sec 166 Insurance Act. This is the problem with insurance nomination.
I’m not saying that insurance nomination is not good but just that these are the risks if you just do insurance nomination itself. Nomination covers certain scenarios but it doesn’t cover more “what-ifs” scenarios mentioned above.
Both Husband and Wife Pass Away in Common Accident and Insurance Nomination Failed
This is the normal case. Wife will nominates 100% to the husband and husband will nominates 100% to the wife in insurance policy. But what if both husband and wife pass away in a common accident? Now the insurance nomination failed and it doesn’t provide the substitution of beneficiaries. How to protect the minor children? In this case, if you’ve no Will, you need to go through the Letter of Administration procedure and there is Will, you need to go through the probate process. These processes normally take some time. Without a Will is 2 to 5 years, with the Will is within 2 years. What I mean is the children are still minor, they still need to carry on with their life, maintenance and education. The assets need to go through these procedures before distributing to the children. It will take long time.
For total peace of mind, it is best to combine both worlds. Insurance is a very good protection product but if you do insurance nomination, it will solve 50% of the scenarios where nothing happen, when you passes to your wife, your wife is financially capable to handle the financial estate and make sure the family will be brought up. But there are also other risks like what if something happen to your spouse when your children are still minor and your insurance money is parked under your spouse. In order to have a total peace of mind, 101% protection, you should consider setting up an insurance trust.
Insurance nomination, because it is a lump-sum payment, it will expose to certain potential risks and problems that I mentioned just now. Insurance trust, because it is a controlled payment, you can mention what circumstances you want to pay out the money. If the children want to buy a sport car then the trust won’t give them the money. If the children want to pay for the college education fee then the trust will only give out the money. It actually lessens the risks and problems of the money not being served in the intended purpose of the parents.
The people and term of the insurance trust is the settlor which is the owner, the beneficiaries which is the internal beneficiaries of your choice, of course the trust asset here is the insurance policy, the trustee, the trust period, how long you want the trust to go on and the protector. The protector is very important, we always advise our clients to nominate protector to act as a watchdog and advise the trustee on the needs of the beneficiaries.
With the insurance trust, actually the money can be given to you and your beneficiaries quickly because insurance money besides paying out for death claims, what if you’re TPD or comatose. If you’re comatose, the insurance money is sort of stuck. How to ensure that although you’re comatose or TPD, you’re still well taken care of by the insurance that you bought initially. With the insurance trust, you decide when to give, how much to give and who to give to. You have control over all these 3 factors. There is no court order required for distribution. Meaning if you set up an insurance trust, once the insurance money is paid out to the trust, the beneficiaries can start benefiting from it. You don’t need to go through the probate process.
What to write in you Trust Deed?
This is how you are controlling the usage of the insurance money. With this trust deed, you can say with this insurance trust deed, I only pay out for my child education to pay directly to the university or college. For my child maintenance, you can mention maybe X amount per month per child inflation adjusted. Let’s say RM2,000 a month per child for their maintenance and living expenses. If they have any medical needs, you can also get from this trust. Next, in the trust deed you can also mention settle outstanding debts or continue to pay monthly amounts. For example you’ve a housing loan and set in the trust said every month pay a minimum loan amount in the event if you don’t have MRTA. You can use part of money to begin probate process also because probate process also required some money. These are what you can state in your Trust Deed.
I think there is still a huge misconception of Trust. A trust is not for rich people only, it is also needed for the people who have medium income. Let’s say you have very little assets, the family situation is do you have young children that will need immediate income when you and your spouse are not around? If the answer is yes, then you need to setup a Trust. The next question comes in. What can you afford to set up a Trust? If you don’t have lots of cash, would you be able to buy a policy? Or have an existing policy that have reasonably substantial amount to put into the Trust? If the answer is yes, you will have a Trust being done using the policy. The trust that you do, you don’t have to do a long term trust. Do a short term one. For example, I probably need this Trust coverage for my children until my youngest is 21. In case I pass away before my child is 21, I know there will be money there available for my children. In the event I live longer than my child is 21, the Trust will automatically lapse by itself, the Trustee will assign back the client the policy and the client can nominate their kids, who are adults and not too financially dependant on their parents.
Do you want to find out more about how to protect your family with Wills & Trust? Here is a free strategy report that I highly recommend: