How to use an insurance trust for your beneficiaries’ well-being.
What is an Insurance Trust?
An insurance trust allows for payments from life insurance policies to be given in a thoughtfully planned out and controlled manner to your intended beneficiaries. An insurance trust has a number of advantages over an insurance nomination or will writing.
How is an Insurance Trust Different?
An Insurance Trust has the following benefits:
- Benefit payout: Controlled administered payment VS a lump sum payment.
- Designated: You have full control on who and how the assets are distributed, including to non-immediate family members or illegitimate children.
- Minors: Helps to make sure beneficiaries who are minors (children) receive regular payouts especially if both husband and wife pass away together.
- Financial security: Helps to protect beneficiaries from others (and self) from creditors, scams, and blowing the monies.
- Immediacy: Funds are immediately disbursed without having to go through the probate or estate administration process.
An Insurance Trust also has the following considerations:
- Insurance Assets: The trust is limited to only life insurance assets (as opposed to a private trust).
- Irrevocable: The trust once setup is irrevocable and non-amendable.
- Islamic Inheritance: An Insurance Trust is not subject to Faraid laws of distribution as once setup is no longer part of the estate.
How to Setup an Insurance Trust
You will need to decide on the life insurance policies that you wish to setup an Insurance Trust. The legal ownership of the insurance policies is transferred to a trustee who will hold, manage, and distribute the assets upon passing away. The condition can also be set if the individual has total permanent disability or in a coma.
A trust document states the trustee’s responsibilities and the the terms to administer the insurance trust. You will want to plan the Insurance Trust in consideration of your goals, your intended beneficiaries, and the amount of distribution. Work with an advisor to decide on the distribution and trustee company according to your wishes and goals.
Goals to Consider
- Emergency funds
- Settlement of debts/liabilities
- Annual household/family maintenance costs
- Children’s education funding
- Medical expenses for self and family
- Other goals
- Insurance Trust Appointment Fee: from RM1,500
- Other Fees (deeds, letter of wishes, etc): RM1,000 or less
- Annual Trustee Fee (applies upon receipt of insurance payouts): 1% or less
An Insurance Trust is a relatively low-cost and highly effective way to make sure that your intended beneficiaries receive life insurance monies. Upfront costs would be below 1%, and 1% annually paid from your insurance policies payout. An insurance trust may be suitable for you if your total life insurance policies sum assured is above RM500,000. This is especially important if you have a family especially with a spouse dependent or minor children.