Don't Forget to Nominate Your Beneficiaries after Buying Insurance Policies!
Looking at the title, most people may start to have some
questions in their mind...
"Why to nominate beneficiaries for my insurance?”
“What is a nomination?"
"isn't my family supposed to receive the proceeds if I die?"
Most policyowners have never taken the steps to nominate the beneficiaries for their insurance policies.
However, the fact is, nominating your beneficiaries make a
huge difference when it comes to claims. The claim settlement process for a
policy with nomination can be much smoother, faster and ensures that your
intended beneficiaries' will receive the insurance proceeds.
Please take note that beneficiary nomination applies to all life policies that involve death benefits, such as your whole life and term plan, PA plan, UL, as well as endowment and investment-linked policies.
1. What happens to claims when there wasn't a nomination?
According to Section 61 of Insurance Act, an insurance company is only allowed to pay up to $150,000 to a "proper claimant" without the "letter of administration" (in case the deceased left no will) or the "grant of probate" (in case the deceased left a will). The balance above $150,000 is only paid when the letter of administration or grant of probate is issued by the court and provided to the insurance company.
Proper claimant can be one of the following:
- Administrator
or Executor of the deceased estate;
- Widow or
widower;
- Parent;
- Child
(legitimate or illegitimate);
- Sibling;
- Nephew or
niece of the deceased.
A few issues might surface at this stage.
No 1. The proper claimant who file the claim might not be the
intended beneficiary. For example, a couple going through separation leading to
a divorce; if death occurs during separation, the surviving spouse will still
qualify as proper claimant, even though the relationship could be sour. On the
contrary, a very intimate co-habiting but not-legally-married partner will not
qualify.
No 2. If two or more claimants compete for the death claim, an insurance
company has the right to withhold the first $150,000 until a letter of
administration or grant of probate is produced.
No 3. The proper claimant who receives the payout is supposed to
distribute the money according to the will or Intestate Succession Act, but
he/she might not be motivated to do so.
No 4. The issuance of letter of administration or grant of
probate by the court can take months or even years, depending on the complexity
of the deceased's estate and presence of disputes if any. This means the
intended beneficiary(ies) will also have to wait a long time before receiving
the payouts exceeding $150,000.
Upon producing the letter of administration or grant of probate,
then an insurance company can release the balance payout above $150,000. Note
that at this time, the cheque will be made payable to the "estate of the
deceased".
If the deceased has left a will, the executor will proceed to
distribute based on the will's instructions.
If there is no will, the administrator shall then distribute
in accordance to the Intestate Succession Act.
The order of distribution is as follows:
Hence, there are some potential problems
surrounding beneficiaries determined by the Intestate Successtion
Act as this may not be how the deceased want his estate to be
distributed. Some of the potential problems are but not limited to:
- Elderly
parents are excluded from the deceased estate if the deceased leaves
behind a spouse and children.
- Stepchildren
(yet to legally adopt) and illegitimate children are not included in the
list.
- Children
from previous marriage(s) might be disadvantaged.
- Ex-spouse
can gain access to the deceased estate as a guardian of their surviving
children.
- Couple going
through separation leading to a divorce is still considered husband and
wife, and hence the surviving spouse is still legally entitled to at least
50% of the estate.
In summary, the claims process can be slow and
tedious in the absence of beneficiary nomination. When there is no will, the
distribution of insurance payout may not reflect the deceased's wishes.
2. What happens when nomination was made?
When there was prior nomination of beneficiary, an insurance company can pay the full death benefit (i.e. not limited to $150,000) without seeing the letter of administration or grant of probate.
Policyholders could nominate one or more beneficiaries and decide on the distribution percentage according to their own wishes.
You can choose to make either a "trust nomination" (Section 49L of Insurance Act) or a "revocable nomination" (Section 49M of Insurance Act).
There are important distinctions between the
two options, as you can see below:
It is easy to note that a revocable nomination offers the policyholder more flexibility. Firstly, your beneficiaries is no longer limited to your spouse and children. You can nominate other people whom you care about or even make it a donation to a charity when you pass on.
Secondly, you can unilaterally change your
nomination anytime in the case of revocable nomination. No consent from the
beneficiaries is needed. Therefore, in case your family situation changes (e.g.
divorce, re-marriage), you can always revise your prior nomination to suit the
new circumstances.
Because of the flexibility it offers, revocable nomination is the preferred
option for most people.
Still, trust nomination has its own unique advantage, that is, the death
payouts are protected against estate creditors, if any. This is very
important and useful, especially for business owners or people with
considerable debts, as it can protect the money you meant for your loved ones
from being diluted by creditors.
It is important to note that if spouse and/or child was nominated as beneficiary(ies) of an insurance policy before 1 September 2009, it automatically becomes a trust nomination (Section 73 of Conveyancing and Law of Property Act). From 1 September 2009 onwards, you can choose to nominate your spouse and child either in a trust nomination or a revocable nomination.
At this point, the benefits of making
nomination for your insurance policies should have become very clear. Mainly,
the benefits are:
- You can pre-arrange the
distribution of your insurance payouts according to your wishes and give
to people you really care about.
- Beneficiaries
now can receive your insurance payouts very quickly and in full. (If the
cause of death is clear, insurance companies usually admit the claims in 1
- 2 weeks)
- Even though
people can still compete for your estate by laying a claim. However, as
your intention was made clear before your death through the nomination of
beneficiaries, the beneficiaries you nominated will likely benefit from
the payout as intended by you.
3. How to make a nomination?
You can make a nomination by following these 4 steps:
Step 1: Decide whether you want to make a trust nomination or a
revocable nomination. In most cases, a revocable nomination is preferred.
Step 2: Download the "Trust Nomination Form" (Form 1: Trust
Nomination) or the "Revocable Nomination Form" (Form 4: Revocable
Nomination) from the website of the insurance company where you bought your
policy(ies).
Step 3: Fill in the form correctly and completely in the presence of 2
adult witnesses of at least 21 years old. The witnesses cannot be any of the
nominated beneficiaries or the spouse of nominated beneficiaries. Ensure that
the percentage of distribution to each beneficiary sums up to 100%. Trustee's
signature is also required if it is a trust nomination.
Step 4: Mail the completed form to the address of the insurance company.
Notify your insurance agent or the insurance company's customer service to
ensure that your nomination is properly received and effected.
Important things to note when you are filling in the form:
1) The date which you indicated on the form and the date of the
witness signing on the form should be the same.
2) No amendments can be made. If you have written anything by
mistake or error, you cannot strike it off and counter sign on the side. A
fresh set of documents are required.
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