Life insurance is meant mainly to protect us against loss of income due to death, disability and a medical crisis. It is also meant to provide us with sufficient resources to pay for medical expenses. We do not need insurance anymore if we no longer have these needs. When we do not or no longer have dependants or when we are retired, and have a sum of money that provides us with lifelong income, we do not need insurance protection against income loss. The only type of insurance that we need for as long as possible is medical expense insurance that pays for hospital expenses. If we understand this well, we avoid paying hefty premiums year after year, buying something that we do not need. More importantly, we can afford to fully cover all our insurance needs at a fraction of the cost of whole life plans.
However, one of the cleverest ways to still sell whole life plans is to position it as an instrument that will provide cash to pay off estate duty in the event of demise. The “sales idea” is this: Upon death (which can happen anytime and therefore the need of a whole life plan), the letter of probate which is needed to release the deceased’s estate cannot be given by the courts unless estate duty has been paid.
But how to pay estate duty when all the monies are still in the unreleased estate? Simple, buy a whole life policy and nominate your spouse or children as beneficiaries at the onset and according to Section 73 of the Conveyancy & Law of Property Act, you would have set up a statutory trust, which means that technically speaking, the insurance proceeds will not be “stuck” with the rest of your estate and you can use these monies to pay estate duty. Another method is to buy a whole life policy and have your spouse own the policy (also known as cross life policies). In the event of demise, the insurance proceeds will be paid to your spouse without the need of probate and these monies can then be used to pay off estate duty accordingly.
These ideas may look sound on the surface but unfortunately, they are full of flaws. The estate duty problem is an estate liquidity issue which can be solve by many other ways. Using insurance as a solution is costly and too simplistic. For a start, even if no plans were put in place and the deceased estate has no ready cash to pay estate duty, the personal representatives of the estate can always submit a special request to the courts to release certain cash assets for the estate duty to be paid before the letter of probate can be extracted.
Secondly, policies incepted under section 73 can be full of complications. If there are any living benefit (such as a critical illness rider) attached to it, it may not comply with the requirements of section 23 of the Estate Duty Act and from a practical standpoint, based on our experience working with clients, different insurers take different stands with regards to this and may still hold on to the proceeds of the policy. This will defeat the purpose of buying the insurance in the first place.
So it seems like buying life insurance and having our spouse own the policy is the most logical solution. The proceeds of the policy go to our spouse directly without incidence of estate duty. But we need to know that this will mean losing full control of our insurance as technically, the policy no longer belongs to us. Not everyone likes this inflexibility. But really, the point is that there is no need to buy insurance (whole life or not) just to solve the estate duty problem.
Singapore has one of the lowest, if not the lowest estate duty rates in the world (for countries which have estate duty). At 5% for the first $12 million and with an exemption of $9 million for residential properties and $600,000 for other assets, the majority of the population would have very little problem with estate duty. To be liable for an estate duty of $50,000 would mean having $1.6 million of other assets on our demise. And really, as one continues to age, this amount will get smaller as we will likely be drawing on it for retirement. The most practical way to provide for estate duty payment is set aside this amount; say $50,000 in a separate bank account under our spouse’s name. On our demise, this amount can be used for estate duty payment. Another method is to establish a revocable living trust and have your assets, including bank account, assigned to this trust. The trustees (which can be anyone you trust like your wife or siblings) can use the monies in this trust to pay off estate duty on your demise. Setting up such kind of trusts is easy and inexpensive.
For the more wealthy individuals whose estate duty runs into hundreds of thousands, it would be worthwhile considering setting up an irrevocable trust. If it is properly set up, assets in the trust should not be dutiable and cash in this trust can also be used to pay off any estate duty that arises from the rest of the estate that is not in this irrevocable trust.
From time to time, we may be approached to purchase whole life policies for various reasons. But as we can see, whether it is for protection against loss of income or as part of our estate planning strategies, there are many other better and cost effective solutions available.
The writer, Christopher Tan, is Chief Executive Officer of Providend, a Fee-only Retirement Financial Adviser. Besides being financially trained, he is also an Associate Certified Coach with the International Coach Federation.