Nomination in insurance policies

After purchasing insurance policies, the next concern is how the proceeds of the insurance policies would be distributed upon the demised of the life assured. How the proceed is to be distributed is important for if it is not done in accordance to the planned intention, it means that the intended beneficiaries are denied the monies meant for them and that the unintended beneficiaries receives a windfall not meant for them.

In the past, many insurance companies and agents have permitted their clients to make nomination in their insurance policies. However, this created a lot of problems. What many clients did not realized is that such nomination created an irrevocable trust under Section 73 of the Conveyancing and Law of Property Act. Under this section of the act, an insurance policy expressed for the benefit of his spouse or children, creates an irrevocable trust.

What is an irrevocable trust? Such a trust is such that the settlor (the persons who setup the trust) does not legally own the assets under the trust. Instead, the ultimate ownership of the assets belongs to the beneficiaries. In this case will be the named spouse and child.

The problems in such cases are:

1. Many clients did not know they created such an irrevocable trust. Insurance agents were not competent enough to advice them and insurance companies were not clear themselves either.
2. Changes to such a policy require the consent of all beneficiaries. If the beneficiaries do not consent or they are still minors, no changes are permitted. Changes such as policy surrender, policy loan cannot be made unless all beneficiaries give their consent.
3. Upon divorce, the trust is still valid. The divorced spouse is still required to give consent. If the divorced spouse does not give consent, nothing cannot be done.
4. Nominations for others who are neither spouse and children are problematic. Are these nominations valid?
5. Every case of dispute that has been brought to court are looked at on a case by case basis. The position is unclear. Some judges give weird judgments.
6. Insurance claims not related to death such as critical illness and hospitalization reimbursements are paid to the beneficiaries – not the insured. If the beneficiaries are minor – how are these monies going to help offset the insured’s medical bills?

Under NTUC’s co-operative act, it appears that the co-operative act provides a way to nominate NTUC Income’s insurance policies without the problem of setting up an irrevocable trust. However, recently there has been suggestion that this too may not be clear when the co-operative’s act is applied to life insurance. In other words, the nomination under the co-operative act could be contested.

Fortunately, new laws have been passed to make these clearer moving forward. MAS will be coming up with procedures for the industry to follow. However, the new laws are no retrospective. In other words – past life insurance policies that has nominations made on it continue to be burdened by uncertainties.

I always advice my clients not to make any nomination in all their life insurance policies. To ensure the proceeds of the life insurance claims are distributed to the rightful beneficiaries, writing it in their Will is the best method.

In the past, advisers have deliberately asked their clients to setup a Section 73 irrevocable trust for the life insurance policies mainly due to the avoidance of estate duty. Previously, such a Section 73 trust setup an estate on its own of which amount up to $600,000 is exempted from estate duty. Since estate duty has been abolished in Singapore, it is no longer necessary to do this. Another reason for setting up a Section 73 is to protect assets from future creditors. This method of doing is cost effective (actually it is free) method but for larger amount (say $1,000,000) a more sophisticated method of credit protections can be arranged through a discretionary trust.

If you have made nominations under the NTUC Income’s co-operative act, I suggest you invalidate the nomination and have your wishes documented under your Will. If you have made nominations in your life insurance under Section 73 – good luck to you.

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