Life insurance policies are basically policies that grant your loved ones a lump sum pay-out in the event of your death. In general, for life insurance policies, there are two different types which are the ones involving Assignments and Nominations.
In this article, we will look at insurance policies whereby there are nominations. When you nominate someone to benefit from your life policy after you’ve passed away, the policy falls into one of two types of policies. These are the trust and non-trust policies.
We have already looked at what a trust policy is when it comes to life insurance, so now we will look at non-trust policies.
What is a Non-trust Policy?
In short, when you have a non-trust policy, the benefits of the policy will form part of your estate. This means it will be subjected to any unpaid debt that you may have upon your passing. To clarify, the payout from the policy can and should be used to repay any pending debts you may have at the time of your passing.
Usually, the nominee of this non-trust policy will not be immediate family members like your parents, children or spouse. Instead, it can be a friend, sibling, distant relative, or even an employee.
Upon your passing, the nominee will then act as an executor, and distribute the policy payout according to your will. However, the executor will first have to ensure that the policy benefits be used to settle any outstanding expenditures and debts, which may include your funeral expenses as well.
Only then, with the remainder of the payout, will your executor be able to distribute the money to whoever you wish to benefit according to your will or according to the laws of distribution in cases where there is no will.
Commonly, non-trust nominees can also stand to benefit from the policy themselves. However, their benefits can be challenged by the deceased’s close family i.e. their surviving spouse, children or parents, especially if there is no will to guarantee that the nominee keeps the payout. It’s also common for the non-trust nominee(s) to just be a beneficiary and not act as an executor.
What can the Nominee of my Non-trust Policy do?
The nominee of a non-trust policy does not have full control or benefit personally from the life insurance payout. Their role is primarily an administrative one. This means they can’t personally use the money that they have from your life insurance.
Instead, their role is to make sure that any creditors claims are fulfilled and any remainder be treated according to your wishes (as laid out in your will) , or according to the laws of distribution.
Does a Non-trust Policy Nominee Benefit from the Policy?
Since the nominee for your non-trust policy does not automatically benefit anything personally, you have to specifically state in your will if you want them to inherit a portion of the insurance payout. This protects their right to keep the payout from being legally challenged by your surviving close relatives.
To clarify, if you do not make any provision for your nominee in your will, or you don’t leave a will to begin with, the remainder of your life insurance payout after settling creditor claims has to be distributed according to the Distribution Act 1958.
This Act distributes a deceased person’s estate ( meaning all their assets and monies) according to a set formula. The distribution formula prioritizes immediate family members and then extended family members only. Meaning only blood relatives or adopted relatives are considered. This means that any friends or persons unrelated to you legally will not benefit.
This is why it is important for you to leave a will in the case of a non-trust policy if you want to take care of a nominee that’s unrelated to you. This may include someone who is very close to you, including girlfriends or boyfriends, mentors, mentees, god-children and the like.
When Should I Choose a Non-trust Policy?
Non-trust policies are usually chosen by individuals who don’t have any immediate family members like children, a spouse or parents.
Alternatively, non-trust nominees can be chosen if you would like to provide for individuals or organizations that are not your immediate relatives ( parents, spouse and children who are usually considered trust policy nominees).
For example, you would like to donate your estate after creditor claims to a charity organization, or you would like the money to go to your brother and only him. Of course, such arrangements have to be accompanied by a will.
Another reason why a non-trust life policy might be chosen is that you want the payout from your insurance to be used to pay your debts and other creditor claims upon your passing. This means you would like the payout to be part of your estate.
Some individuals also choose this type of insurance policy because they would like their estate to be distributed in combination with the rest of their estate, as a whole and not separately. How their estate is distributed as a whole might be specified in their will or be distributed according to the Distribution Act in the case the individual dies intestate ( without a will)
Importance of Making Life Insurance Nominations
Whether you choose a trust nominee or non-trust nominee for your life insurance policy, the payout will be processed almost immediately upon your passing.
This means that the money will be moved much faster than if you left your life insurance without nominees. Without a nominee or nominees, your life insurance payout could take months or even years to reach the people you want to benefit.
Important Notes on Muslim Life Insurance Nominees
In the case of a Muslim life insurance policy holder, any nominee(s) you nominate will immediately be non-trust nominees. This is because Muslim nominees will act as executors to distribute the payout according to the Islamic law of inheritance, known as Fara’id Law.
Key takeaways on Non-trust Policies
The important thing to remember here is that non-trust policies form part of your estate. The main difference with trust policies is that a trust policy will be paid in full to the nominee or nominees. These nominee(s) can enjoy the entirety or the payout in any way they want. The payout from a trust policy is not subjected to creditor claims.
Non-trust nominees, on the other hand, will receive your life insurance payout as part of your estate. They are usually not close relatives ( not your spouse, parents or children) and your policy pay-out will be subjected to creditor claims and debt repayments. A non-trust nominee’s insurance benefits can be challenged in court by close relatives if there is no will to guarantee these benefits.
Note: All images courtesy of xframe.io
