I had recently wrote about the advantages as well as the importance of making an insurance nomination. The policy owner can choose to make a trust nomination or revocable nomination if he/she wants to decide who to receive the insurance payout.
When the policyowner make a trust nomination, sometimes referred as Section 49L, he lose all rights to the ownership of the policy to the nominees. On the other hand, the policyowner of a revocable nomination( also known as Section 49M) will continue to retain the full rights and ownership over the policy. In this article, the focus will be on just Trust Nomination.
Regardless of Trust Nomination or Revocable Nomination, the person(s) to receive the payout are known as “Nominee(s)”. However, most of us are more familiar with the term “beneficairy(ies)” so in this I will use “nominee” interchangeably with “beneficiary” in this article.
What is a Trust Nomination?
A Trust Nomination allows the policy owner to create a statutory trust for the nominee (beneficiaries). Unlike a revocable nomination where the policy owner can nominate almost anyone (even to a stranger), a trust nomination is more restrictive. The policy owner can only nominate the spouse and/or children as the beneficiaries.
Anyone above the age of 18 years old can make a trust nomination.
What happen after a Trust Nomination is made?
As the policy owner, you will continue to pay the premium. However, as mentioned earlier, lose all rights to the ownership of the policy to the nominees. What this means to you in the event that a claim is made on all benefit on death or living benefits such as critical illness will goes to the nominees as well.
Losing all rights to the ownership of the policy to the nominees also means that you need the written consent of all the nominees if you need to make simple changes to the policy such as change of residential address. The policy owner will also need the written consent if he wants to terminate the policy or take a loan under the policy. If the policy owner wish to make changes to the beneficiary e.g. to add in the newborn, the existing nominees must all revoke the existing trust nomination before the new one can be done.
Why Trust Nomination?
In layman terms, I explained to my clients that when you make a Trust Nomination, it means that you just pay for the premiums and forget about the policy. You may be curious that why would a policy owner make a Trust Nomination if it is so inflexible. The main reason for having a Trust Nomination is that it protects the policy proceed from creditors in the event of bankruptcy.
What this means is that if the policy owner at the point of death is a bankrupt or a person can prove the policy owner owes him money, they can have the first charge to the policy proceed and the remaining, if any, goes to the family. Thus, a Trust Nomination prevents the creditors to have access to the money to pay off the debt. As inflexible as Trust Nomination can be, it can be a useful tool to protect the family especially if the policy owner is a business man whose business is highly leveraged.
What are the disadvantages of Trust Nomination?
There are some issues that I had seen the course of work when the policy holder made a Trust Nomination.
One of the most common issues arise from divorce. Assuming Alan & Amy were happily married and Alan bought an insurance policy then nominated it to Amy under Trust Nomination. A few years later, the relationship turned sour and they got divorced. Alan then marries Betty and wants to put her as the new beneficiary. Remember we mentioned any change in the policy needs the written consent from the nominee. In this case, Alan needs Amy to revoke her rights to as nominee to this policy then he can nominate Betty as the new nominee regardless it is under Trust Nomination or Revocable Nomination. There are many reasons as to why Amy refuse to revoke her rights and Alan cannot do anything about it. Not forgetting the fact Alan still needs to pay the premium and the insurance proceed will be paid to Amy.
There can be issues even if the marriage is intact. There was a case the policy holder bought a plan and named her child who is a minor as the nominee under Trust Nomination. She needs the child’s written consent to take a loan from the policy but because the child is a minor, the guardian/parent of the child has to act on his behalf. And in this case, it will be the father of the child i.e. the husband of the policy owner. The father will act on the child’s behalf to give the written consent for the policy loan. The insurance company will issue the cheque on the father’s name in which he will encash it then pass the money to the wife who is the policy owner.
A few problems that can happen –
- The father can choose not to give the money.
- The father is an undischarged bankrupt. The money will be transferred to the Official Assignee and at their discretion on how to use this money.
- There may be no named guardian if this was a single parent family and further complicates the process.
Another situation that is possible but very unlikely. The policy owner nominated his spouse as the nominee under Trust Nomination. He was later diagnosed with critical illness and successfully made a claim for his advance stage cancer. The insurance proceeds goes to the spouse. Similarly, the spouse can decide to spend or keep the money instead of using it for his cancer treatment.
Most policy owners nominate their child and forget they will grow to be adult and have their own family. The distribution of the nominee’s share in a Trust Nomination when he/she dies is also different from a Revocable Nomination. Assuming the beneficiaries in a nomination are Mother 50% and 25% each between two children. The following shows the differences between a Revocable Nomination and Trust Nomination in the situation if one of the child passed away.
If Child A pass away, her shares will be shared equally among the surviving beneficiaries. And if the mother also pass away, Child B will be the sole beneficiary.
In a Trust Nomination, the portion of the beneficiary share will never leave the beneficiary. In the same situation where Child A pass away, it will go to her estate. In the situation if Child A grows to an adult and gets married, there is a possibility that her share will go to the spouse. This may not be the original intention of the policy owner.
In conclusion, each nomination method has its pros and cons. While Trust Nomination have its restrictions but is useful to protect against creditors. My advice is think twice before deciding which nomination to use for your policies.