By Goh Chin Lian

CHANGING the beneficiaries of an insurance policy will be a reality for new policyholders, following changes to the law that currently bars them from doing so.

Parliament's nod yesterday to changes to the Insurance Act also means that new policyholders can opt to receive payouts themselves in the event that they fall ill or become disabled.

The amendments, which will take effect after the President gives his assent, address 'concerns over the apparent ambiguity and inflexibility' in the current law, said Mr Lim Hng Kiang, deputy chairman of the Monetary Authority of Singapore, which regulates the insurance industry.

Added Mr Lim, in explaining the changes: 'This framework will give policy owners clear, simple and economical means to decide on how the proceeds from their insurance policies should be disbursed.'

One of the difficulties with the current law is that a policyholder who nominates his spouse, but then divorces, cannot change the beneficiary of his policy.

There are also situations where a policyholder who falls ill or becomes disabled is unable to access the payout from his policy, which has gone to the beneficiary he has named.

Another problem that has arisen is in situations where policyholders have named grandparents, siblings, aunts or friends as beneficiaries.

What they fail to realise is that other than their spouses or children, all these parties have no legal claim to the proceeds of the insurance policy under the existing law.

The only way in which such a payout can currently be made legally to people other than a spouse or children is if the policyholder names them in his will.

With the changes that Parliament passed yesterday, a policyholder will have two ways of nominating beneficiaries.

The first, and most flexible, option allows him to unilaterally change his beneficiary at any time. This is known as a revocable nomination.

Any payout from, say, a health insurance or accident insurance policy will also be paid to him while he is alive. It will go to the beneficiaries only when he dies.

He can also nominate any legal entity, including parents, friends and trusts, as a beneficiary.

The second way to name a beneficiary is similar to the current situation - through an irrevocable nomination.

By opting for this, the policyholder will lose all rights and control over his policy. He cannot change a beneficiary without the consent of all beneficiaries or a trustee. Payouts while he is alive will also go to his named beneficiaries - and he can name only his spouse and children as beneficiaries.

Under this option, a statutory trust will be created that will protect the payout against claims from creditors.

The new framework will not apply to insurance policies with existing nominations, Mr Lim clarified. It will cover life policies, and accident and health insurance policies that have death benefits.

Insurance policies bought under the CPF Investment Scheme and Dependants' Protection Scheme will be eligible only for revocable nominations, he added.

This article was first published in The Straits Times on January 20, 2009.