Estate Planning Should Not Be Optional
Since the cover story in this issue is on life insurance, I shall write about a related topic: estate planning. When you buy a life insurance, you will need to make sure that the death proceeds are distributed to the intended persons. It's pointless buying a life insurance when you cannot be sure that the intended beneficiaries are able to benefit from it. Thus, estate planning comes into the picture.
Almost everyone does some form of estate planning. When you open a joint-account with your wife or purchase a property with your spouse jointly, you are already doing some estate planning. What exactly is estate planning?
Estate planning is the identification of the best methods for the holding of assets, the transfer of assets and the distribution of assets. It is often thought that estate planning is only meant for those who are dying or for the very rich.
Actually estate planning can only be done when one is alive, is of sound mind and it is even more important for the very poor. Why is this so? This is because if you do not do any estate planning when you are alive, the authorities have an estate plan for you when you are dead.
The default estate plan, known as the Intestate Succession Act (ISA) comes with numerous flaws. The ISA is not able to help you ensure the Administrator will not embezzle your hard earned assets that are meant for your family. The ISA is also not able to determine the guardian of your children. Moreover, the ISA just assumes all your assets have some market value which can be sold and distributed according to the stipulated percentages. But as many investors would know, sometime investments are in the red and the last thing you want is for it to be sold at distressed price. Thus, estate planning ensures these risks are mitigated if not eliminated.
Those who are very rich have access to financial and legal advice on the best method to transfer their wealth to the next generation. This is because financial institutions have incentives to ensure such wealth remains intact so that they could continue to earn their management fees. However, the poor do not have many assets in the first place. Yet it does not mean that the poor do not need to have an estate plan.
In Singapore, estate planning is a subject that is seldom touched on. Most financial advisers sell life insurance and investment products because commissions for these products can be large. The poor can have a large estate using estate creation technique through life insurance but such life insurance, known as term insurance, gives low commissions.
