Question: 

Hi, I’m Alan, a 37-year old engineer based in Kuala Lumpur. I’m married to Abby, my wife and together, we have two children aged 3 and 5 presently. Here, in the event if I pass on prematurely in the future, I intend to prepare a sum of:

As such, my question is: ‘Should I buy myself a life insurance policy that covers a total of RM 800,000 and nominate Abby, my mother and both children to be my beneficiaries of the policy?’ 


Answer: 

The answer is nope. 

This is because the issue lies with insurance nomination, which can be rigid and limited in terms of distribution and usage of its sum assured to its beneficiaries, upon the passing of the life assured. 

The above reveals common mistakes made by the life assured when purchasing a life insurance policy, which could potentially cause needless financial conflicts among its intended beneficiaries in the future. As such, the life insurance policy which was bought with the intention to offer financial peace to your loved ones could instead bring additional strife and animosity among family members. 

So, in this write-up, I’ll expound 5 main issues arising from Alan’s nomination of his next insurance policy. Of which, I’ll list down a handful of practical strategies so that Alan could fulfill his financial intentions: 


Issue #1: Nominating Alan’s Mother 

First, there is a difference between a trust policy and a non-trust policy. 

As a married man, a trust policy is a policy, where he nominates his wife and his children to inherit the sum assured of his policy. His wife and his children would be the real beneficiaries of the policy and thus, will be able to use the proceeds freely upon receipt. 

Whereas, for Alan, a policy shall become a non-trust policy, when he nominates his parents, siblings or friends to inherit its sum assured. If any of them receives the sum assured, they shall act as executors to the sum assured and are obliged to use them to first settle Alan’s outstanding liabilities and taxes owed and then distribute them to Alan’s beneficiaries in accordance with his will (if he had one written before his passing) or based on the Distribution Act 1958 (if Alan fails to write a will before passing on). 

Thus, if Alan nominates his mother, she cannot use the RM 200,000 freely as an inheritance. She has to act as an executor to this money, which is some legwork to administer the money and finally, could likely end up receiving a lot less than the intended amount Alan wishes to leave behind for his mother. 


Issue #2: Nominating Alan’s Children 

Alan could pass on prematurely when his children are still minors. If this occurs, their portion of the sum assured will be collected by Abby for she is the mother of his children. However, if Alan passes on after his children reach 18, they shall collect their own portion of the sum assured individually. 


Issue #3: Nominating Abby, Alan’s Wife 

If Alan passes on prematurely, Abby shall first receive her portion and as well as her children’s portion of the policy’s sum assured. Subsequently, she will collect the remainder of her and her children’s portion of the sum assured after paying off Alan’s outstanding debts and taxes owed, assuming her children are minors. 

The question is: ‘What if Alan and Abby pass on simultaneously?’ 

Who shall then be the legal guardian of their children? 

Will it be Alan’s mother or would there be someone else? 

The above is an important consideration to Alan and Abby, if they want to make sure that their children will be cared for by a trustworthy family member, in the event when both of them pass on together. 


Issue #4: Control over Usage of Insurance Proceeds 

Let’s say, Abby received most of the sum assured from Alan’s policy. Of which, it will be up to Abby to utilise the money as she may deems fit. Alan will not have any say or control in how Abby could use the money upon receipt. 

This means, if Abby is financially smart, Abby could further grow the sum into a much larger fortune. However, if Abby is financially immature, it is very possible for her to squander the amount left behind to her and her children via business failures, investment losses, excessive spendings, abuse, scams and so on and so forth. 


Issue #5: Rigidity in Frequency of Distribution 

The sum assured shall only be distributed in one lump-sum by Alan’s insurer. Alan cannot do staged distribution of sum assured with insurance nomination. For instance, Alan may prefer to distribute his sum assured in this manner:

In Alan’s case, Alan needs to establish an insurance trust to fulfill his intentions. An insurance trust is a trust set up to collect Alan’s sum assured and administer the proceeds in accordance with Alan’s wishes stated in his trust deed. 


Conclusion

In short, Alan can buy a life insurance policy but he should rethink the purposes for purchasing this policy. The most ideal would be for him to consider writing a will and setting up an insurance trust to fulfill his financial objectives. To do this effectively, he would need the assistance of a professional estate planner. 

So, have you committed the same nomination mistakes as described above? 

Or, do you plan to have a staggered distribution of wealth to your loved ones? 

If that is you, you may book yourself a nice 30-minute consultation session with our professional estate planner by filling up your details below: 


Jocelline Chee
Jocelline Chee

As a Full-time Senior Professional Estate Planner, Jocelline seeks to understand every client’s unique asset holdings and legacy wishes, before recommending a suitable Will and/or Trust structure to meet their needs. She is well-equipped to point out various blindspots in Legacy Planning, that her clients may have. With Jocelline, you can be assured that your legacy planning journey will feel more like having an open-hearted coffee session with a trusted friend, as compared to a formal and awkward session with an equipped advisor.

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