If you are born in 70s or are in your 40s, you may be able to relate to the stories I am about to share. Being brought up in a middle income family society, there were certain expectations from our parents due to lack of resources at the time. We were expected to do well at school and help out with house chores during the weekend, we even cooked for our families sometimes. Our favourite past times were playing at playgrounds, football, and for me personally, playing marbles!
As we grew older, we played the role of tuition teachers to our younger siblings as there were not many tuition centres to choose from and those were expensive. It could be said that we were given such responsibilities from young that we carried them to adulthood.
Moving forward to today, our parents are now aging and we ourselves have young children at home to nurture. With our parents growing older by the day,
medical costs can become a burden every time they visit a doctor. Their slower-paced lifestyle and lack of ability to absorb their surroundings can sometime become a test of patience for some of us. On the other hand, with our kids we have to effectively fill their days with educational activities so that they may be equipped to face the challenges of tomorrow’s world. With our hands and resources stretched beyond the horizon, we are sometimes called the sandwich generation, the older generation on top of us and a younger full of energy generation to feed at the bottom. This explains why our health deteriorates faster with illnesses such as hypertension, diabetes and obesity becoming part of our stressful lifestyle.
Imagine with so many obligations in place, if something unexpected were to happen to us, the impact on our family members and those who depend on us would be devastating. The family support system would likely fail if no proper financial planning is in place to protect our loved ones from financial burdens. These obligations can be addressed and pre-planned by using an insurance trust. Even if there had been proper estate planning, without finances, families would not likely survive for a month. By having an insurance trust, family members will be able to have continuous financial support for the remainder of their lives.
For an insurance trust to be effective, firstly the owner needs to find a large enough lump sum to create an immediate estate for the family. Usually the best and cheapest means to do this is by having an insurance to fund the trust. This is possible because the trust only takes effect upon the death of the bread winner. To establish the amount of insurance, one must first work out how much survival income the family needs for a certain duration of time until the last child is fully independent. Other factors to consider are education needs and medical expenses of the surviving spouse. We may also need to determine how much funds are needed to maintain our aging parents’ medical needs and welfare too. Once we can establish how much insurance is sufficient to maintain the family in event of a death, we can purchase the insurance or use existing insurance policies to establish the trust.
The insurance policies are then assigned to the trustee, who in event of death of the policyholder shall distribute according the trust deed that has been set up. Therefore it is important to have a corporate trustee rather than an individual trustee for perpetuity reasons and better administration because a corporate trustee shall give an account for record keeping as opposed to an individual who may not have the capacity to do so. By having the insurance policy assigned to the trustee, once a premature death occurs the insurance proceeds shall be paid to the trustee for distribution to the family of the deceased according to the trust deed that has being set up. The benefits of the insurance trust can be summarised below:-
- Creditor proof once set up subject to the Bankruptcy Act 1967.
- Does not form part of the estate therefore no need for probate, immediate cash for the family.
- Payment to the beneficiaries can be in lump sum or in staggered payments to avoid spend thrift beneficiaries from using up the money in a short time.
- Deceased owners have full control over the insurance proceeds as spelled out under the trust deed.
- The duration of the trust can be established.
- Can be used to fund education of minors until they reach maturity.
- Can be used to take care of medical and welfare needs of family members both seniors and spouse.
- Deceased clients can withhold money for future use such as wedding gifts, start up business ventures or even home down payments.
- Can be used for payment of debts.
The list of benefits are endless depending on the needs of the family and the ability to purchase the insurance premium initially. The set up cost is very affordable initially but clients must be aware of the subsequent trustee fees upon administration of the trust. The insurance trust not only protects the interest of loved ones but also gives peace of mind to the owner knowing the trustee shall follow the instructions given under the trust deed.
This article is written by Mr. Lawrence Seow, Head of Financial Planning, VKA Wealth Planners Sdn. Bhd and was published in Money Compass Magazine (English) on October 2013.