WHY IS LIFE INSURANCE A VERY USEFUL FINANCIAL INSTRUMENT IN ESTATE PLANNING?

After receiving insurance proceeds, do beneficiaries have to pay tax?

In general, after a beneficiary receives life insurance proceeds, he doesn't have to pay tax as the money is not a profit or income. It is a compensation. This rule also applies to personal accident insurance proceeds.

Life insurance is a very useful financial instrument in Estate Planning because it is a very liquid asset besides the benefits I have explained previously in my post titled IS IT TRUE THAT RICH PEOPLE DON'T NEED INSURANCE PROTECTION AND FINANCIAL PLANNING? (January 13, 2009). Once an insured dies, the insurance company will usually pay the life insurance proceeds to his beneficiaries in less than a week provided that he has made nominations and his policy is immediately submitted by his family together with related documents like death certificate to the insurance company. The high liquidity of life insurance is very important to ensure that his family daily life will not be affected significantly after his demise. Besides life insurance, a person who has bought personal accident will be compensated immediately after his death due to an accident. In other words, the liquidity of personal accident is also very high.

Life insurance and personal accident are very important especially when we are no longer around because our wealth can't be distributed immediately to our loved ones even though we have a will like what I have explained previously in my post titled FINANCIAL PLANNING SEMINAR (THIRD DAY). (January 21, 2009). Once our wealth becomes an estate, our loved ones have to wait for at least six months before they can get the money. Within the period, they can still live comfortably if we have bought life insurance. For details about the importance of personal accident, please read my post titled WHY IS A PERSONAL ACCIDENT (PA) PLAN VERY IMPORTANT IN OUR LIFE? (January 9, 2009).

It is hard to know how much assets and liabilities we have. We will usually know how wealthy we are after we are no longer around or bankrupt. There was a real case where an old woman got nothing from her husband's will because his assets were not enough to settle his liabilities. In other words, a will just makes sure that the process of transferring a wealth from one person to the other people is smoothly done after all debts are settled. Furthermore, he didn't buy life insurance. As a result, the old woman suffered from two pains, financial (no money to live comfortably) and mental or emotional (loss of her spouse) due to her irresponsible husband. We may say that they had no money to buy insurance. In fact, they lived in a bungalow before his demise. But, the bungalow was already sold to settle his liabilities.

ARE INSURANCE PROCEEDS A PART OF AN ESTATE AND WHY ARE NOMINATIONS VERY IMPORTANT?

Insurance proceeds are compensation or money received by his beneficiaries after an insured's death.

The answer for the first question above can be yes or no. It all depends on whether a policyholder makes nominations during the application of life insurance. If he does, the life insurance proceeds will usually be distributed to his beneficiaries in less than one week. If he doesn't, the life insurance proceeds will become a part of his estate and the money will be distributed according to his will or the related law. It usually takes at least six months to get the money. This rule also applies to personal accident insurance proceeds.

So, it is very important to make nominations when we are buying insurance so that our family will get the compensation as quickly as possible in order to prevent them from facing the problem of getting the money in a short time. When we are no longer around, six months will be a very long period for those who depend heavily on us such as our surviving spouse and children. They still need to spend money on food, education and others.

For details about the elements of an estate, please read my post titled WHAT ARE THE ELEMENTS OF AN ESTATE? (January 29, 2009).

WHAT ARE THE ELEMENTS OF AN ESTATE?

The general meaning of an estate was explained previously in my post titled FINANCIAL PLANNING SEMINAR (THIRD DAY). (January 21, 2009).

Generally, a person's estate refers to all of his property like

• real property / immovable property
• personal property / movable property
• tangible personal property
• intangible personal property
• property right

Before his estate can be distributed according to his will or the related law, he has to settle all of his debts or liabilities like taxes, loans and others. So, he still has to settle his debts even with a will. Without a will, the distribution of his estate will take a longer time than the time he takes when he has a will.

Real property refers to anything that is permanently attached to a land such as buildings, houses, shoplots and so on (including lands). These items can't be moved.

Anything that is not real property is called personal property. Personal property can be either tangible or intangible. Tangible personal property refers to physical personal property such as cars, watches, jewellery and so on. Whereas intangible personal property refers to anything that we can't touch or hold like shares, bonds, business secrets, copyright, trademarks and others.

Generally, a property right is the legal right to use resources or refers to the ownership of resources like lands, capital and other goods.

The theories of property are very complicated. For details, please click the following links:

• http://en.wikipedia.org/wiki/Personal_property
• http://en.wikipedia.org/wiki/Immovable_property
• http://en.wikipedia.org/wiki/Property_rights

WHAT WILL HAPPEN TO A PERSON'S ESTATE IF HE DIES TESTATE (WITH A WILL)?

When a person dies testate (with a will), his assets will become an estate. His estate will be distributed to his loved ones only after his liabilities have been settled even though he has a valid will. After his liabilities have been settled, his remaining estate will be distributed according to his will.

Please read my posts titled WHAT WILL HAPPEN TO A PERSON'S ESTATE IF HE DIES INTESTATE (WITHOUT MAKING A WILL)? (January 27, 2009) and FINANCIAL PLANNING SEMINAR (THIRD DAY). (January 21, 2009).

WHAT WILL HAPPEN TO A PERSON'S ESTATE IF HE DIES INTESTATE (WITHOUT MAKING A WILL)?

When a person dies intestate (without making a will), his assets will become an estate. After his liabilities have been settled, his remaining estate will be distributed according to the Distribution (Amendment) Act 1997 in West Malaysia and Sarawak. Intestate Succession Ordinance 1960 is the law governing intestacy in Sabah. Both laws are only applicable to non-Muslims and non-natives. For Muslims, the law governing intestacy is Islamic Distribution Laws.

For details, please click the following links:

• http://www.malaysianbar.org.my/conveyancing_practice/law_realty_when_a_person_dies_without_making_a_will.html?date=2008-11-01
• http://whyneedwill.com/tag/distribution-act-1958/
• http://www.malaysianwill.com/malaysia_distribution_act.html
• http://maths.usm.my/faraid/eng/default.html
• http://www.islaam.com/Article.aspx?id=462
• http://en.wikipedia.org/wiki/Islamic_Inheritance_jurisprudence

Please read my posts titled WHAT WILL HAPPEN TO A PERSON'S ESTATE IF HE DIES TESTATE (WITH A WILL)? (January 28, 2009) and FINANCIAL PLANNING SEMINAR (THIRD DAY). (January 21, 2009).

FINANCIAL PLANNING SEMINAR (THIRD DAY).

After today, I finally finished my Financial Planners Program (FPP). Today, I learnt about Estate Planning. Estate Planning is the most interesting subject in Financial Planning Seminar (FPS).

The speaker who was from AIA Berhad told us a lot of real stories on how badly people will behave when they are discussing the portion they will get from the distribution of their parent's wealth. We can image the real stories by watching the Hong Kong dramas such as 溏心風暴 (Heart Of Greed) and 溏心風暴之家好月圓 (Moonlight Resonance). At first, some people will cry because of their parent's death. However, when their lawyer comes and announces the contents of their parent's will, the first thing they want to know is how much they will get from their parent's will.

From the seminar, I learnt that having a will is very important in our life but it is not the end of the story. Most people including me generally presume that our assets will be automatically transferred to our loved ones after our demise. Unfortunately, there is no such law in Malaysia. Once a person dies, his assets will be frozen immediately even with a will and the frozen assets are known as an estate. Once assets become an estate, it can't be transferred to his loved ones although he has a will until his liabilities like tax, personal loan and borrowing have been settled by his family. We still have to settle our liabilities even though we are no longer around. From here, I know that we can't escape ourselves from paying tax. We can only minimize our tax payment in legal ways. Some people may think that they can transfer all of their assets to their children early before they are no longer around. However, many people are sent to old folks' home after their assets have been transferred to their so-called obedient children. So, we must think carefully when we want to transfer our assets to other people before it is too late.