We work hard to gather wealth to provide financial security for our loved ones, however, there are unforeseen events that could hinder or frustrate our plans for the future, making it essential for us to build reserve against unanticipated events. One of such reserves could be taking a life insurance policy or establishing an estate plan.
Life insurance is a widely known concept, at least to those who have thought about the future at some point and who have assets to leave behind for family members. A Life Insurance is a contract between a person (the “insured/policyholder”) and an insurance institution (the “insurer”), where the insurer promises to pay a named beneficiary, a sum of money (the “benefits”) upon the death of the insured. Benefits could also be paid on a life insurance policy that is triggered by terminal illness or a permanent disability. A payment (the “Premium”) is usually made to the insurance institution monthly or as otherwise agreed, for the maintenance of the life insurance policy. There are several types of life insurance, a few of which are applicable to estate planning, for instance, we offer our clients Term Assurance Plan, Memorial Benefit Plan and Mortgage Benefit Plan.
Now, while life insurance may be used to provide for the family on the death of its benefactor as described above, the proceeds under a life insurance policy may also provide immediate cash for estate taxes. Therefore to understand life insurance in estate planning, estate planning, and trusts, of which people are much less aware of, must also be explained.
Simply put, estate planning is the plan for disposal of an individual‟s estate according to his/her wishes before or after death. Estate planning is administered in several ways but most commonly through Wills and Trusts.
A Will is simply a written declaration or statement by a person (the “Testator”) naming one or more persons, human or entity, as beneficiaries of his/her property after death. Another person or persons are also named in the Will as executors of the Estate with property to be distributed after the Testator‟s death.
A Trust, on the other hand, is a legal arrangement where an individual (the “Settlor”) gives control of his/her property to another, advisably an institution (the “Trustee”) by transferring legal title of his/her assets to the Trustee, for the benefit of beneficiaries to the Trust.
Taking a Life insurance Policy for an Estate
In the case of a Will, Babake (a “Testator”) takes on a life insurance policy stating in his Will that his beneficiary of the Insurance Policy is his only son, Omoke. The insurance company then pays out the insurance benefits of the Policy to the only beneficiary of the Will, Omoke upon death of the testator, Babake. Sometimes, payment may be delayed or withheld at the slightest contest of the Will. In this case, Omoke learns that Babake fathered a female child named Omota, years before who now has learned that her father left a Will. She brings evidence of her birth, claiming that her father sent her birthday presents all her life and also visited a couple of times. The mere fact that there is proof Babake fathered, acknowledged, and „cared‟ for Omota, claiming to be his daughter, means that she has a right to contest the Will. This also defeats the purpose of „instant‟ cash if Omoke meant to use the proceeds of the life insurance for the payment of his father‟s funeral expenses, as such proceeds will be held pending the contest and the court‟s final decision in respect of the Will. In the case of a Trust, Babake, the Settlor, names TrustUs Co., a trustee company, pursuant to a Trust Deed, as his Trustee to manage his Assets, including his life insurance proceeds. Thus, he transfers all these proceeds to TrustUs Co. thereby naming the Trustee as the beneficiary of the life insurance proceeds. Thus, TrustUs Co., as the trustee, will pay the premiums on the policy from the Trust assets now belonging to the Trust on behalf of Babake. On the other hand, TrustUs Co., acting on behalf of the Trust, will take on the life insurance policy, naming itself as the legal beneficiary (acting on behalf of Omoke, the actual beneficiary) of the proceeds. Either way, upon the death of Babake, the Settlor/Testator, the insurance proceeds would form part of the Trust assets and would be distributed to the actual beneficiaries of the Trust as set out in the Trust Deed.
Benefits of Life insurance in Estate Planning
Life insurance in Estate Planning is particularly beneficial in the following instances:
- Benefits of the life insurance policy may be useful to pay funeral and associated expenses. This is in view of the difficulty which may be encountered in connection with liquidating the assets of the Estate in time to meet such expenses. However, Trusts are more useful in achieving this benefit due to long probate process involved in Wills.
- Secondly, the benefits under a life insurance policy can be used to cover the costs of settling an Estate. Such costs may be a combination of costs of paying assessed estate taxes and legal fees associated with distributing Trust assets and obtaining probate for Wills.
Life Insurance and Estate Planning in Nigeria
A major challenge is that African culture does not recognise the benefits of preparing for an unforeseeable future and the future of loved ones. Estate planning in Nigeria is not as popular as it ought to be. Although, the administration of Estates in Nigeria is very much active and Probate Administration is an essential part of a deceased‟s Estate in Nigeria, the idea of life insurance has not garnered enough talk amongst Nigerians. About 90% of Nigerians die intestate, while 97% do not have a life insurance policy. Life insurance is not expensive as many people perceive it to be. Illustratively, where a person obtains insurance policy of N10million and pays a premium of one (1) thousand naira every month, in event of death, the family/beneficiaries of the deceased will receive a minimum of N10million notwithstanding when policyholder‟s death occurs or how many premiums were made before death.
For Nigerian companies with employees, life insurance is compulsory.Section 9 (3) of the Pensions Reforms Act 2004 (the “PRA”) states that:
“Employers shall maintain life insurance policy in favour of the employee for a minimum of three times the annual total emolument of the employee.”
The PRA gives full details of employees‟ rights and obligations regarding pension and life insurance benefits. Section 5 (1) of PRA says,
“Where an employee dies, his entitlements under the life insurance policy maintained under subsection (3) of section 9 of this Act shall be paid to his retirement savings account”.
Section 5 (2) of the law goes further, stating:
“The pension fund administrator shall apply the amount paid under subsection (1) of this section in accordance with section 4 of this Act in favour of the beneficiary under a will or the spouse and children of the deceased or in the absence of a wife and child, to the recorded next-of-kin or any person designated by him during his life time or in the absence of such designation, to any person appointed by the Probate Registry as the administrator of the estate of the deceased.”
This may be interpreted to mean that where a deceased employee constituted a Trust before his or her death, entitlements under a life insurance policy may be paid to his Trust as designated by him during his life time under the provisions of his trust deed. The National Insurance Commission is working to ensure the enforceability of life insurance in the workplace which is already a legal obligation, by considering the possibility of imposing sanctions on non-complying companies. Having said all, it is highly recommended that estate planning should include life insurance. At ARM Life Plc, we offer insurance products while our estate planning affiliate ARM Trustees Limited is positioned to advise on estate planning alternatives.
Kindly note that the above article is not intended for advisory or consultancy purposes and therefore it cannot be represented as legal or professional opinion of ARM Life or its employees.