By Lorna Tan
The wheels have at last been set in motion to scrap an archaic law that stops policyholders from changing the beneficiaries of their insurance policies, even when events like divorce alter circumstances.
The law now creates what is known as an 'irrevocable statutory trust' whenever the buyer of a life insurance plan names his spouse or children as beneficiaries.
It's a mouthful but essentially it means, for example, that even if a person wants to change the beneficiary from an ex-spouse to a new one, it may not be possible.
Many policyholders learn of this only during divorce proceedings when, to their horror, they find that their ex-spouses may still have claims on their policies.
Or it comes to light when the insured person dies, often sparking bitter family disputes.
This is the issue: If you have named your spouse or children as beneficiaries of your policy, you have effectively created a statutory trust under Section 73 of the Conveyancing and Law of Property Act (CLPA). This is even if you did not explicitly want to.
The limitations on you are extensive. You cannot change your beneficiaries, or cash in your policy. And you cannot take out a loan on it without the consent of the beneficiaries.
In other words, the policy effectively becomes the property of the beneficiaries, protected by legislation designed to ensure that such policies are safe from creditors in the event of a bankruptcy.
It gets worse. There are even doubts that a Section 73 trust can be revoked even if the beneficiaries give their consent.
Many policyholders also do not realise that - regardless of whether or not they have a spouse or children - if they name other parties such as grandparents, siblings, aunts and friends as beneficiaries, these people have no legal claim to policy proceeds.
The only nominees who have such rock-solid claims are spouses or children - or if the policy is from insurance cooperative NTUC Income.
In fact, if you wish to leave your policy proceeds to people other than your spouse and/or children, the only way you can do so is to make a will naming them as the beneficiaries. If you do not, proceeds will be disbursed according to intestacy rules.
The controversies surrounding such trusts had prompted the insurance industry to do away with nominating beneficiaries in life policies since 2002.
The exception is Income because its policy proceeds are paid to nominees under a different law - the Cooperative Societies Act - and this Act allows a cooperative member to make a nomination, which can include spouse, kids, relatives and friends.
The good news is that a proposed new framework will address some of these issues by allowing for both irrevocable and revocable nominations. Here is a summary of the proposed changes.
- Creation of an irrevocable trust
The proposed new Section 49L provides for a trust nomination quite similar to Section 73 of the CLPA.
This nomination is irrevocable and is only for a spouse and kids, said Ms Ang Kim Lan, director of Goodwins Law Corporation. However, it can be revoked at any time with the consent of the beneficiaries. New nominations can then be made.
- Creation of a revocable nomination
The new Section 49M allows for revocable nominations of any legal entity, for example, spouse, children, parents, friends and trusts.
These nominations are not trusts and can be revoked at any time. And unlike irrevocable trusts, there is no need to obtain the consent of the beneficiary to amend the nominations, said Ms Ang.
The advantage of the new framework is that the policyholder can decide whether to nominate his spouse or children under the new S49L (irrevocable trust) or S49M (revocable nomination).
Having a revocable nomination will also enable the insured to appoint suitable beneficiaries or trustees to his policy proceeds. This is a limited avenue now and will be a big plus particularly if the insured does not have a will, said Ms Lie Chin Chin, the managing director of law firm Characterist.
A distinctive feature of revocable nominations is that the policy proceeds will be paid to the policyholder if he is still alive and to his beneficiaries if he is dead. If the beneficiaries pre-decease the insured, then the nomination is deemed to be revoked, said Hin Tat Augustine & Partners.
In such a situation, money will be paid to the policy owner's estate upon death.
Under the existing Section 73 framework, this will not happen. Instead, the proceeds will be paid to the deceased beneficiaries' estate to be distributed in accordance with his or her will, if any, or in accordance with the Intestate Succession Act.
- Partial nomination of policy proceeds
Another distinctive feature of the proposed revocable nomination is that the policy owner may make a partial nomination of the death benefits under his policy, if he so wishes.
- Application to other policies
The new amendments also broaden the scope to cover more types of policies. Previously, it was only life policies that fell within the statutory framework under Section 73 CLPA.
Under the proposed amendments, owners of accident and health policies with death benefits will also be able to make a nomination.
Disadvantages of the new system
Unfortunately, the new framework is not a panacea for the old problems.
- The new system is not retroactive
It does not address the issues associated with existing Section 73 trusts as it is not retroactive. Only nominations made after the new framework kicks in will benefit.
Take the case of a divorce. The policyholder of an existing S73 policy remains trapped in that he cannot revoke the nomination unless he has the consent of his ex-wife, whom he nominated during the days when all was well in the marriage.
Another way out is to bring the issue before the divorce court and have the policy treated as part of matrimonial assets.
This was the case for Ms Carol Poh (not her real name). Ms Poh, 46, found out that she had unwittingly created a Section 73 trust over her life policy only after reading a newspaper article on the topic a few years ago.
She had named her then-husband and two daughters as the beneficiaries in 1996 when she bought her plan - and so created a Section 73 trust.
Ms Poh said her insurance agent gave her the impression that she could re-nominate the beneficiaries any time. But this was wrong.
Her ex-husband never knew of the existence of the policy and Ms Poh is trying to revoke the nomination without his know- ledge.
They parted on bad terms so she is certain he will never consent to her removing him as a policy beneficiary. She is now trying legal avenues.
- Potential payout mistakes by insurers
Nominations made under irrevocable trusts cannot be superseded by the contents of a will of the policyholder.
But for revocable nominations, a will, drawn up after the revocable nomination is made - and made known to the insurer - will override such nominees.
A policy might name certain nominees like friends or siblings but if the insured wants death benefits distributed to others and this is reflected in the will made out after the policy nomination, then the later will trumps the policy, in other words.
But problems may arise if the insurer is not told of the will and pays out to the nominated person who has been cut in the will.
So care must be taken to avoid wrong payouts by insurers, otherwise they will be going against the intentions of the insured, said Ms Lie.
Chronology is also important. Ms Ang said the latest amendment is the one that carries weight. So if the policy's nominees are changed after the will is drawn up, those nominees will get the benefits.
Legal firm Hin Tat Augustine & Partners suggests that the policyholder keep track of whether or not he has made a nomination and mention the nomination to his lawyer when he is executing a will so as not to unintentionally revoke any nomination made previously.
What the insurers say
To help consumers better understand the new framework, the Life Insurance Association of Singapore (LIA) is preparing a guide.
LIA president Darren Thomson assured policyholders that they will have a 'simple' method for making nominations of beneficiaries and revoking them.
There have been concerns that additional paperwork could mean higher premiums but Mr Thomson said that it is too early to gauge if there will be extra administrative work or costs to insurers.
'Costs should reflect that it is a simple method for making and revoking nominations,' he said.
This article was first published in The Straits Times on January 18, 2009.