Here is a case study: 

Let’s say, we have Bill, a 45-year old sales manager based in Penang. At present, Bill is married to Kate and they have Linda, their 10-year old daughter. Together, they reside in a terrace house with Bill’s mother, who is 70 years old. 

Bill bought a life insurance policy that has a total of RM 500,000 in sum assured and he has not nominated a beneficiary to inherit this sum assured from his life insurance policy. As such, the question is: ‘What will happen to this policy, if Bill passes on prematurely in the near future?’ 

Now, this is tricky. 

This is because the answer depends on the following scenarios below: 


Scenario #1: Bill Passes On Intestate (i.e. Without a Will)

In this case, the life insurance policy shall form part of Bill’s estates and as such, will be frozen upon his death. 

To unlock it, Bill’s family members will first have to decide on who to administer his estates. This can be either Kate herself as the sole administrator or Kate and Bill’s mother as joint administrators of Bill’s estates. The administrator would be starting off the process by applying for its Letter of Administration (LOA). 

The cost and timeframe to obtain its LOA shall depend on: 


a. The total value of Bill’s estates. 
b. The lawyers that the administrators choose to engage. 
c. How quickly the administrators can secure 2 sureties for Bill’s estates (if they are needed) 


Typically, the process could take around 6-9 months and instead of receiving his estates, the administrator would first incur cost to administer the estates. Then, upon obtaining the LOA, the administrator would proceed to retrieve all of Bill’s estates (including his life insurance policy), pay off all of Bill’s outstanding debts and taxes, and finally, distribute the net proceeds, according to the order stated in the Distribution Act 1958. 

It means, the balance amount of his sum assured after netting off his debts and taxes, shall be distributed in one lump sum in accordance to the ratio below: 


a. 1/4 to Bill’s mother. 
b. 1/4 to Kate (Bill’s wife). 
c. 1/2 to Linda (Bill’s issue). 


If Linda is still a minor, Kate shall collect Linda’s portion as her legal guardian. 

All in all, the duration from Bill’s passing to the distribution of sum assured may range between 12-18 months and it can be longer if there are hiccups along the way. 


Scenario #2: Bill Passes on Testate (i.e. With a Will) 

Let’s say, Bill has a sister named Betty. Bill wrote a will where he: 


a. Appoints Kate to be the primary executor of his will. 
b. Appoints Betty to be the secondary executor of his will (if Kate passes on). 
c. Appoints Betty to be Linda’s legal guardian if Kate passes on. 
d. Intends to provide, from his RM 500,000 in sum assured, the following: 

– RM 3,000 a month in living allowances to Linda 
– RM 200,000 in tertiary education fees if Linda enrolls into a university. 


So, what will happen to his life insurance policy upon Bill’s passing? 

First, like Scenario #1, his life insurance policy would be frozen and it forms part of Bill’s estates. However, unlike the scenario above, Kate could begin the entire estate administration process immediately for she is the executor of Bill’s will. If Kate passes on simultaneously with Bill or passes on shortly after Bill’s death, in this case, Betty could take over as the executorship of Bill’s will and be the legal guardian to Linda. 


So, there is more certainty to this aspect as compared to Scenario #1. 

The executor shall apply for the Grant of Probate (GP) from the High Court. This process could take around 3-6 months to complete and it is a lot faster than the time needed to obtain the LOA. Then, the executor would collect all his estates, settle all of his outstanding debts and taxes, and finally, distribute the total final amount of the sum assured (netted from debts and taxes) to Linda based on his instructions below: 

– RM 3,000 a month in living allowances to Linda 
– RM 200,000 in tertiary education fees if Linda enrolls into a university. 


Hence, the time frame from Bill’s passing to its first distribution of cash to Linda or to her legal guardian shall range between 12-18 months. 


Scenario #3: Bill Set Up a Living Trust Before Passing On 

Alternatively, Bill could set up a living trust and he assigns the policy to his trust where in his trust deed, he specifies: 


a. Linda to be the sole beneficiary of his life insurance policy. 
b. Kate to be the legal guardian and Betty to be Kate’s substitute legal guardian. 
c. To provide Linda with RM 3,000 a month in living expenses. 
d. To provide Linda with RM 200,000 in tertiary education fees. 

What will happen to this policy if Bill passes on prematurely? 

First, this policy will not be frozen and it shall not form part of Bill’s estates. 

Instead, the trustee of Bill’s living trust shall retrieve the sum assured from Bill’s life insurance company. Then, his trustee shall distribute the proceeds based on Bill’s trust deed to Linda or her legal guardian. The first distribution of cash shall be made within 7 days upon the trustee’s collection of the sum assured. 

Some questions: 


Is the application for LOA or GP needed to administer the cash? 

Nope. 


Is the hiring of lawyers needed? 

Nope. 


Is the appointment of sureties needed to guarantee Bill’s estates? 

Nope. 


Is the sum assured creditor-proof? 

Yes.


Is the appointment of executors or substitute executors needed? 

Nope. This is because the trustee is usually a corporation and thus, is immortal. 


But, won’t insurance nomination resolve the issues above? 

Nope. There are a number of limitations to insurance nomination and it is quite possible that it may not serve your objectives. Read this article here


Conclusion: 

Well, if you have life insurance policies and you intend to have a say in how the sum assured is to be distributed and utilised in the future, I believe, it would be practical for you to consider setting up a living trust. 

To do this, you may need the assistance of a professional estate planner. Hence, if that is you, you can start by filling in the details below to book a short session (30-minutes) with our professional estate planner to guide you on how you can set your very own living trust: 


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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