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Important Things about Insurance Nomination

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Are you intending to buy insurance policies? If so, this is an article that you must never miss. And I want you to pay close attention to the message contained in this article. If unsure, do read it over and over again. Today, I am going to share with readers the Insurance Nomination Law promulgated by the Singapore government on 1 September 2009. I suspect many Singaporeans are not aware of this relatively new legislation. So, I hope readers will find this information useful in their wealth building journey.

Insurance Nomination

In recent years, many financial bloggers have been espousing the merits of direct purchase insurance products. However, most people may not be familiar with the insurance laws in Singapore. Without the proper advice from financial advisors, many consumers may end up buying the wrong insurance products that may not suit their needs. Hence, I always feel that financial advisors offer a value proposition even under today’s technology evolution.

Again, I must emphasize that this article is not meant to be a form of financial advice. It is for information only. If in doubt, please consult your financial advisor.

Making nomination

When you buy insurance, you are seeking protection for your loved ones. In the event that you passed on, you would want them to inherit a sum of money so that their standard of living would not be affected by your death. Hence, it is important to decide carefully who should be your beneficiaries. You certainly don’t want your loved ones to be entangled by the myriad of paperwork in the midst of grieving your passing.

First, it is not mandatory for you to make a nomination for your insurance policies. But you must be aware of the consequences of not making a nomination. According to Monetary Authority of Singapore’s Moneysense “Your Guide to the Nomination of Insurance Nominees”, if no nomination is made, the insurance company may pay up to $150,000 of the policy proceeds to any person considered a “proper claimant”. Any remaining amount above $150,000 will be paid to the executor(s) named under a Grant of Probate or administrator(s) named under a Grant of Letters of Administration.

The proceeds of your policy will be distributed according to your will if you had made one. Otherwise, the proceeds would be distributed in accordance with the Intestate Succession law.

Given the above situation, it is strongly encouraged that you make insurance nomination if you want your insurance proceeds to be distributed according to your wish. You should be aware that the Intestate Succession law may not distribute your estate according to your desire.

Group Insurance

Before jumping to the conclusion that you need to make nomination for all your life insurance policies, it must be highlighted that insurance nomination may not be appropriate for group insurance policies.

Many companies purchase group insurance for their employees as part of their welfare benefits. The insurance company will issue the master policy contract to the company and thus the company is the policy owner. Thus, the employees do not own the policy but enjoy the benefits.

Due to the fact that the policy owner (the company) is not the life assured, insurance nomination is not allowed over group insurance policies.

Trust Nomination and Revocable Nomination

Under the new law, policy owners of life policies or accident and health insurances are given two options. You, as policy owner, may choose either Trust Nomination or Revocable Nomination. It is important to understand the differences between these two types of nominations because it would shape the way how you plan your estate.

Fundamentally, when you choose Trust Nomination, you lose all your rights and interests to the ownership of the policy. Yes, it means that the policy does not belong to you anymore although you are still obliged to continue to service the premiums. You cannot revoke the nomination without the written consent of the nominees.

Only your spouse or children can be nominated for Trust Nomination. The living and death benefits will go to them. Once a Trust Nomination is made, the policy no longer belongs to the policy owner. As such, the policy owner has absolute no control over the policy.

Due to the fact that policy owners lose all their rights and controls once a Trust Nomination is made, Trust Nomination is not allowed for certain types of policies bought under CPF Investment Scheme, Supplementary Retirement Sum (SRS), CPF Minimum Sum Annuities and Dependent Protection Scheme (DPS) as the policy owners would not have control over such policies in his lifetime.

Henceforth, Trust Nomination is very onerous and inflexible. So, think twice before you made the decision to make the nomination. Always remember that Trust Nomination is irrevocable without the consent of the nominees. If there are any changes to the family circumstances, you will not be able to unilaterally change your nomination.

On the other hand, for Revocable Nomination, you retain the full rights and control over the policy. It means you can change or revoke the nomination any time you want. Only death benefits will be payable to the nominees. The living benefits will be payable to you. Also, you do not need to inform or seek the nominees’ written consent before making changes to the nomination. This flexibility is important because family circumstances often change in the form of divorce or birth of new child.

Existing Policies

For those who have bought insurance policies before the Insurance Nomination law was implemented, their nominations would not be affected because the law is not applied retrospective. But if you had not made any nomination on your policy, you can now make either a Trust Nomination or Revocable Nomination under the Insurance Nomination law.

Whatever the case, if you wanted to make changes to your insurance nomination(s) under the new law, please seek advice from your financial advisor. As stated above, there are financial implications for the two types of nominations.

Conclusion

In my humble opinion, a Trust Nomination may not be better than a Revocable Nomination. However, the former is very onerous and lack the flexibility. Once you opt for Trust Nomination, you are effectively giving away the insurance policy while still having to service the premium. In short, you don’t own a insurance policy that comes with Trust Nomination.

As family circumstances always change with time, you need to think twice before nominating your insurance beneficiaries.

Read my other related articles:

  1. CPF Nomination and Making A Will
  2. Understanding the Difference Between Critical and Terminal Illness for Insurance
  3. Health Insurance
  4. Insurance: Blood in Urine

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SG Wealth Builder

 

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2 Comments

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  1. The main advantage of trust nomination is protection against creditors / bankruptcy proceedings. Some business people use it for their children — they have individual policies for each of the kids … New kid just add another policy & trust nomination. Cheaper alternative than setting up living trust fund.

  2. Hi Sinkie,

    That is a good point! I overlooked the part on protection against creditors.
    I guess this is the key merit of having a trust nomination for insurance policies.
    Thank you for your guidance!

    Regards,
    Gerald
    http://www.sgwealthbuilder.com

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