It is said that life insurance is like a parachute. Therefore, many breadwinners of urban families in Malaysia have bought life insurance to protect their families from the many uncertainties of life.
Ironically, before the Insurance Act 1996 was replaced by the Financial Services Act 2013, many life insurance policy holders have appointed themselves as trustees of their own policies.
This didn’t make sense at all, as to file a life insurance claim, the policyholder has to either be suffering from a critical illness, is senile, in a coma, permanently disabled, or dead. How good is a trustee if he or she was in such a condition as described above?
Under this new Act, which came into effect on July 1, policyholders can no longer name themselves as the trustee to their own life policies. This applies to new policies but existing policies may be affected as well should the policyholder die without making proper back up plans.
During a talk held at a leading hotel in Ipoh recently, Saw Leong Aun, Group Managing Director of Rockwills Corp Sdn Bhd, explained to participants the potential risks involved in relation to this change. He described at length, Schedule 10 of the Financial Services Act 2013 and its implications on policyholders.
The potential risks include the inability of the surviving spouse to manage a large sum of money, the spouse remarrying before the children reached the legal age of 18, or even death of the spouse who is the automatic trustee, if there was no proper appointment made.
What if the individual trustee was biased, or if there was a special-needs beneficiary involved?
In cases like these, the purpose of taking out life insurance is defeated, as the insurance monies may not go to the persons the policyholder had intended it to go to, or it could even be held by the public trustee, Amanah Raya Bhd.
Saw also explained the differences between a direct nomination and licensed corporate trustee, and how assigning the policy to a corporate trustee is the ultimate protection for life insurance money.
Major advantages of an insurance trust are naming of substitute beneficiaries, instructions to distribute insurance funds periodically, and customised payment schedule for each individual beneficiary to prevent squandering or being conned by others.
While the onus is on responsible insurance agents or estate planners to explain this new policy to their clients, those who are holding a life insurance policy and have appointed him or herself as trustee of the policy are advised to make the necessary changes to comply with the new rule and protect their insurance monies.
Incidentally, Rockwills Corp Sdn Bhd is the number one financial and estate planning company in Malaysia. The company is in a position to advise anyone who requires further information.