The Role of Insurance Funding
The significance of insurance in estate planning often goes overlooked by many people. Although some have a basic understanding of its role, it is essential to fully comprehend its importance. If you are unfamiliar with the role of insurance in estate planning, let us be your guide.
The role of insurance in estate planning is straightforward, and this article aims to summarise and explain it comprehensively.
Basic Principles:
Here are the key points to know about insurance in estate planning, with three main roles of insurance policies:
1. Death benefits for Named Beneficiaries:
Upon your passing, the death benefit from your insurance policy is distributed to your named beneficiaries. If no beneficiaries are named, the benefit will go to your estate.
2. Providing Liquidity to Your Estate:
Life insurance offers easy access to cash upon your death, providing essential liquidity to your estate. In some cases, you can access cash from your life insurance policy even before passing away, depending on the type of policy you have.
3. Financial Support for Your Loved Ones:
Your loved ones, named as beneficiaries in your insurance policy and/or estate, will receive financial support through the insurance benefits tied to you. This ensures that strangers do not benefit from your insurance policy.
Tax Implications in Malaysia:
Insurance payouts in Malaysia are not tax-free. However, the death benefits from life insurance policies are exempt from income tax. This means that beneficiaries receive the entire amount without any deductions to the Inland Revenue Board (IRB) or Lembaga Hasil Dalam Negeri (LHDN).
Income Replacement and Access to Cash:
While some might view insurance as a get-rich-quick scheme for beneficiaries, having certain basic knowledge of insurance and how money and finance works would reveal that it is not exactly the case. In reality, insurance benefits are meant to cover specific expenses rather than making beneficiaries wealthy overnight.
To better illustrate, here is an example:
Sum Assured: RM500,000
Debts: RM350,000
Funeral Expenses: RM70,000
Remainder: RM80,000
Beneficiaries:
- Beneficiary 1 (25% share);
- Beneficiary 2 (25% share);
- Beneficiary 3 (25% share); and
- Beneficiary 4 (25% share).
Each beneficiary gets: RM20,000
The payout distribution after the policyholder’s death is subject to various factors such as debts and funeral expenses. The beneficiaries will receive their shares after settling any outstanding debts and funeral costs, as illustrated in the example provided.
Conclusion
Insurance payouts in estate planning may not be overly complex, but it is crucial to have a comprehensive understanding of their implications. If you require assistance with insurance payouts and estate planning, feel free to reach out for further guidance and support. We are here to help you with any queries or concerns you may have.
