Nomination of Beneficiary of Life Insurance Policies
One of the best developments in estate planning in 2009 is the ability to nominate beneficiaries in your life insurance policies with legal certainty. The parliament has passed the law and gazetted it under Section 49L & M of the Insurance Act on 1 Sept 2009.
This law helps to provide another important tool for estate distribution OUTSIDE of a will.
In the past, one could only nominate their spouse and children as beneficiary with legal certainty in an insurance policy. This can create many estate distribution issues; for example, one cannot nominate one’s elderly parents, close friends, nephew, niece, or siblings as beneficiary of a life policy.
If you are a Muslim, most of your estate will be distributed according to the rules of Faraid. This might result in some weak family members not being sufficiently provided for, especially so if these family members are female.
If you are in a non-traditional relationship, your partner will also be excluded from the insurance nomination under the old regime.
If you use your life policy to fund business buy-sell agreements, the inability to nominate the other business partners in a policy creates legal uncertainty.
Besides property, the life insurance proceeds are probably the next substantial chunk of your estate. Thus, it would require some careful planning.
There 2 forms of nominations you can make: revocable or irrevocable nominations.
According to section 49M of the insurance act, you are able to make a revocable nomination on your policy to any person (who need not be your family member) or legal entity (i.e. a company, trust, or organisation). Every insurance company will gladly email you the nomination forms.
You need to fill in the following:
- Policy details (one form for each policy, if you have 5 policies from one insurer, you need to fill up 5 sets of nomination forms)
- Your beneficiaries’ details (name, date of birth, IC or business registration numbers, address).
- You need to sign the forms in the presence of 2 witnesses, who in turn need to sign as well.
Upon your death, the insurance company will pay the proceeds in your beneficiary’s name without the need for probate or a letter of administration. Otherwise, the insurance company can only pay out up to $150K to the proper claimant and freeze the rest until the grant of probate, letter of administration or certificate of inheritance (in the case of a Muslim) is produced.
Even if the grant of probate is produced, there is another issue. The balance of the policy proceed will be paid to the “estate of the deceased” instead of the family members. This might cause further administrative problems.
Irrevocable nominations take the form of section 73 of the Conveyance and Law of Property Act (CLPA). The beneficiary is confined to your spouse and/or children.
The administration of this form is similar to S49M revocable nomination, with the exception that you need to identify at least one trustee in the nomination.
Besides facilitating the smooth wealth transfer to the beneficiary without going through probate (similar to S49M revocable nomination), the other main advantage of irrevocable nomination is that your insurance proceeds are shielded from estate creditors. This is an important advantage as one’s estate can be exposed to creditors’ claims upon one’s death. For example, in May 2012, a driver crashed his high performance car into a taxi, causing 2 deaths and 2 serious injuries. The driver himself was also killed in the accident. The car insurer repudiates its liability claiming that the crash was a “collision” and not “an accident”. As the car insurer was bound by law to pay out the compensation to the 3rd parties, it then sued the driver’s estate to recover the compensation amount, causing much stress to the widow. If the life policies were under irrevocable nomination, the creditor (the car insurer in this case) cannot touch the insurance proceeds.
If you are a Muslim, the MUIS in Singapore has issued a FATWA in Feb 2012 that a Muslim can do either irrevocable or revocable nomination on life policies.