Insurance nomination was recently brought up by a Sunday Times article (“Policyholders advised to name their beneficiaries, 10 May 2015, Sunday Times). The article gave a lop-sided impression of the importance of insurance nomination by stating only its advantages without mentioning the disadvantages. In this article I want to give a more balance opinion on insurance nomination.
Before I continue, I assume the reader already understand that there are two types of insurance: A trust and non-trust nomination. If you are unfamiliar with these two nominations, you can read this booklet: Your Guide to the Nomination of Insurance Nominees 2015 by the Life Insurance Association.
Here are the advantages of insurance nominations:
- Payout process of the insurance proceed is potentially faster because the insurance company knows exactly who to pay to. The insurer does not need to see the Letter of Administrations or Grant of Probate. The fast payout is useful to help the deceased’s family overcome liquidity problems especially if the deceased is the sole breadwinner.
- If the nomination is done under Insurance Act Section 47L, the policyholder enjoys asset protection provided the nomination was done in good faith.
- The insurance nomination you make is free of charge done by your existing financial adviser / insurance agents.
- Insurance nomination is useful if the death proceeds of a policy is solely for an entity who is guaranteed to be capable of receiving it such as a living trust.
Here are the disadvantages of insurance nominations:
- It is not wise to make insurance nomination to minors (children). If insurer transfers such large amount of money to the children’s bank account, these children may not know how to manage it. If the insurer transfers the money to the guardian, the guardian may not be a trustworthy person. Besides, appointment of guardian has to be done through a will. But a will has to go through Probate. Hence, if the insurer insists in giving the children’s proceed to the guardian, the proceeds will still be delayed by the Grant of Probate which the nomination’s advantage of fast payout becomes negated.
- It is possible to appoint a trustee under the Section 47L but this kind of nomination is irrevocable and should not be done unless there are absolutely no other alternatives.
- You cannot make a nomination based on ‘classes’. For example, you cannot nominate “equal shares to my children”. You have to specifically name your nominees. Thus, future children will be excluded since you cannot name an unborn/unknown child.
- You cannot make a nomination based on if-else conditions. For example, you cannot do this: “If my wife is still alive, give 100% to her; else 100% to my child”.
- An insurance nomination cannot deal with how the actual proceed is to be used. For example, you cannot state in the nomination form that the money is to be used to clear a bank loan and for children’s tertiary education. You just have to assume the nominee can read your mind as to how the money is to be used.
My suggestion: I do not think it is necessary to have a nomination in most cases The reason is because in the event of no nomination, the insurer has the right to pay up to $150,000 to the ‘proper claimants’ who are the executor, spouse, parent, child, brother, sister, nephew or niece of the deceased.. This amount can already be used for any immediate liquidity needs of the deceased’s family. The insurer is protected by law from liability once they make payment to the proper claimants under Insurance Act Section 61(2)(c).
It is important to note that payment to the proper claimants does not confer any legal entitlement to the proper claimants. This means if your Will state that 100% of your estate is to be given to your spouse but your parent turns up at the insurance company’s office to collect $150,000, your parent has to give this $150,000 to your wife because your wife is the rightful beneficiary.
Similarly if you die without a will and you are survived by a wife and children, under Intestate Succession Act 50% goes to wife and remaining 50% equally to children provided you are not a Muslim. If your parent turns up to collect $150,000 as a proper claimant, your parent must give half of this money to your wife and remaining half to your children.
Still, there are cases which nominations may be useful. The following are the cases which I did helped my clients make insurance nominations:
- A client purchased a $X,000,000 single premium endowment from me. He wants to ensure the death proceed goes to his girlfriend who is not a Singapore resident. The lady is neither his wife nor a relative. Since the death proceed does not go through Grant of Probate, this is a cheap way to ensure the proceeds are distributed confidentially. Unfortunately I do not think it is very confidential because the adviser would know of the distribution (and the adviser may not be the same adviser who transacted the initial policy). The proper way to distribute it confidentially is to assign the policy to a trust and allow the trustee to distribute it.
- A client purchased a $xx,000,000 regular premium insurance policy from me and make a nomination in favour of a living trust. The advantage of this is that the trust can start doing ‘its job’ soon after the death of the settlor and does not need to wait for Grant of Probate in the event if the client wills his policy to the trust. I have a few of such similar cases.
- A high networth client has decided to become a business owner. He made a few nominations under Section 47L of the Insurance Act in favour of his wife so that the policies will be protected from creditors. These nominations were made before he came to see me for consultation for estate planning. I advised him and his wife that this kind of nomination becomes problematic in the event the nominee (i.e. his wife) predeceased himself because the trust remains irrevocable and the nominee’s interest while alive form part of the nominee’s estate. Hence, I helped his wife to have a proper will written to will her nominee interest to her children.
The conclusion of the matter is that insurance nominations are not necessary in most cases although useful in some. I advise people to have a proper financial plan done up instead of narrowly focusing on certain aspect of financial planning. You don’t want to focus on the trees but missed the forest.
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