Thursday, October 1

New insurance law addresses pitfalls of trusts

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New insurance law addresses pitfalls of trusts
By Lorna Tan, Senior Correspondent
(Taken from the Sunday Times on the 27th of September, 2009)

Life has just become a lot easier for holders of life policies, thanks to a new law that has simplified the rules governing the process of nominating beneficiaries.

The Insurance Nomination Law, as the regulation is known, came into effect on Sept 1 and is a vast improvement over the previous regime, which created irrevocable (trust) nominations - an area that has caused much heartache over the years.

The pitfalls of such trusts were obvious.

An irrevocable trust was created when you nominated your spouse or children as beneficiaries of your policy.

This meant you had set your policy in stone in that you could not change the beneficiaries or cash out the proceeds without the consent of all the nominees.

Many policyholders were unaware of the undesirable consequences of establishing an irrevocable trust and realised their predicament only when they were caught up in a divorce. To their horror, they found that their former spouses still had claims on their plans.

Confusing matters further, insurers allowed policyholders to nominate people other than a spouse or children as beneficiaries, such as parents and siblings, but these were not legally binding. Many policyholders made such nominations without realising that their nominees had no legal claim.

Indeed, the controversies surrounding such nominations prompted the insurance industry to do away with nominating beneficiaries in life policies in 2002. Most policyholders who still wanted to name beneficiaries were encouraged to draw up a will.

There was an exception for policies bought from insurance cooperative NTUC Income. It came under a separate Act that allowed a cooperative member to nominate such people as spouses, children, relatives and friends as beneficiaries.

The new regime allows for both revocable and irrevocable (trust) nominations. Unlike previously, revocable nominations of spouses and/or children as well as other entities are allowed. It means you can change your nomination at any time without your nominees' consent.

Policies with trust nominations incepted before Sept 1 are not covered by the new law, which is not retrospective, but if you have an existing policy with no trust nomination in place, you can now nominate beneficiaries.

Here are eight things you need to know.

1. Why making a nomination makes sense

Making a nomination is not compulsory, but the new regime provides a simple avenue to ensure that your policy proceeds are paid out to the right person at the right time and in the right amount. Compared to the alternative of writing a will - which costs around $300 or more - the new rule is a clear and affordable legal means to distribute policy benefits to your nominees.

2. Revocable nominations

Under the new law, those who take up life, accident and health policies with death benefits can create either a revocable or a trust - also called an irrevocable - nomination.

A revocable nomination means you retain full ownership over the policy, including the ability to change, add or remove nominees at any time without their consent.

Only death benefits are payable to the nominees. All living benefits such as the one that should be paid if you contract a critical illness go to you.

If you have only one nominee and he dies before you, a revocable nomination is automatically revoked. If there is more than one nominee and if one dies before you, his portion will be added to each surviving nominee's share of the benefits.

3. Trust nomination

This form of nomination - also called an irrevocable nomination - is inflexible and you should consider it only if you are prepared to give away the insurance proceeds completely to your nominees.

A policyholder relinquishes all rights to the policy, meaning all benefits, including living and death, belong to your nominees but you must still pay the premiums.

It also means that you need to get the written consent of all nominees before you can revoke the nomination, make any change, surrender or take a loan under the policy.

When a nominee dies before you, his share of the policy proceeds goes to his estate.

One advantage of a trust nomination is that the policy proceeds are protected from creditors.

4. How to nominate

You must be aged above 18 to make revocable and irrevocable (trust) nominations. The policyholder must specify the percentage share of the policy proceeds that each nominee will get. Two witnesses aged above 21 must also be present.

5. Policies excluded for nominations

Trust nominations are not allowed for policies bought under the Central Provident Fund Investment Scheme and Dependants Protection Scheme, as rules dictate that you must retain control over your retirement funds as long as you are alive.

Trust nominations also cannot be made under the Supplementary Retirement Scheme as the use of savings in this programme is restricted to products that have the potential of growing your own pool of retirement cash.

Policies with a trust nomination facility do not fulfil this criterion as you will no longer have control over the policy proceeds during your lifetime.

Both trust and revocable nominations are not allowed for annuities bought under the Minimum Sum Scheme as any residual money from the policies upon your death or policy termination must be refunded to your CPF Retirement Account for distribution.

6. Options for existing policyholders

The fact that the new law does not apply retrospectively is creating some rather complicated situations for people who already had policies in place before Sept 1.

Given this complex backdrop, the Life Insurance Association encourages policyholders to check with their insurers before making fresh nominations.

Here are some of the possible scenarios you might confront:

  • If you own policies bought before Sept 1 and have never made any nominations, you can now make a revocable or trust nomination under the new law.
  • If you named your spouse or children as beneficiaries, you have created a statutory trust under Section 73 of the Conveyancing and Law of Property Act and your nominees will continue to be recognised. The new law does not apply retrospectively, so it has no impact.
  • If you had named people other than your spouse or children as nominees, the new law will let you make fresh nominations in your plan.
  • If you had named your spouse or children and other people or relatives, your ability to make nominations under the new law will depend on the status of these nominations and the terms of your existing policy. You may have to seek legal advice.

7. If you do not make a nomination

In the absence of a valid nomination, the insurer may pay up to the first $150,000 of proceeds from a policy to a proper claimant. The balance will form part of the deceased's estate and will be distributed according to the intestate law or a will.

8. What to do before making a nomination

First, decide whom you want to name as your nominee(s). Also use the right form and specify the proportion of benefits you want each nominee to receive, ensuring that they add up to 100 per cent of the policy proceeds.

Ensure all details of each nominee are accurate and that the witnesses meet the requirements set out in the form.

And lastly, notify your insurer that you have made a nomination and send in a copy of your form.

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