Mortgage Insurance (Home Protection Scheme)

The properties in Singapore are purchase with two types of ownership if there are more than one owner . The property will be either under joint tenancy or tenancy-in-common.

JTIn a joint tenancy, the owners have equal share of the property. The ownership of the property will be automatically passed on to the surviving co-owners regardless if a Will was made. Most HDB properties are under this arrangement.

Another type of ownership i.e.  Tenancy-in-common allows each owner to have a different share of the property and to leave his share of the property to any beneficiary upon his death. The beneficiary may receive his share in equal or different percentage. This type of ownership usually occurs in private properties and in certain situation, it can be for HDB flats, depending on the scheme that the flat is purchased.

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In the above example, the Husband can Will his share of 35% to the wife, son and daughter at 20%, 10% and 5% respectively.  Therefore, the total share among them will be wife (45%), Son ( 20%) and daughter (35%). This distribution can cause an issue such as the wife even though holds the majority of the share at 45% but the total holdings of the children is 55%. If they children decides to sell this property, the wife can only agree to it.

We will discuss about the distribution issues in future and for now, there is a bigger problem with property ownership with outstanding loan. In the above situation, regardless of Joint Tenancy and Tenancy-in-common, if a mortgage insurance (or more commonly known as Home Protection Scheme for HDB) is not in place to cover the husband’s share, the beneficiaries will continue with the loan. If this property has an outstanding loan of $1mil, this amount will be re-structure with the surviving owner’s financial ability to loan base on their Total Debt Servicing Ratio(TDSR) . What this means is there can be a possibilty that the bank will not approve the same $1mil outstanding loan to the new owners due to a lower TDSR because of lower income. The owners will have to pay up $200,000 if the approved loan is at only $800,000. In the worse case scenario, the new owners may have to force-sale the property instead of inheriting it.

The most cost effective way to cover the outstanding loan is to have a mortgage insurance. Typically, an owner can have an individual policy to cover or a joint-life mortgage insurance to cover the first death of the owners.

Assuming a couple took an individual policy to cover their $1mil outstanding loan, the mortgage may look like this.

husband

wife

The total premiums will be $5555.55

In the event if the husband passes on, the $1mil will be paid out to the family so that they can offset the loan. The surviving owner can choose to terminate or continue with her own policy. If both pass on (e.g in a traffic accident), a total of $2mil will be paid.

Alternative, some will choose to use a joint-life mortgage insurance and the couple will buy a $1mil policy to cover the first death of the owner. Will this be cheaper or more expensive?

Here’s an example

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In the event if the husband passes on, the $1mil will be paid out to the family so that they can offset the loan and the policy will be terminated. The premium is $5616.60

Which is a better option depends on individual’s situation. It is uncommon the total premium of 2 individual policies cost more than a joint-life policy. Do talk to your financial adviser to have a proper assessment of your risk. Our intention of purchasing a property is always to pass down an asset, do not leave behind unsettled debt.

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Associate Estate Planning Practitioner(AEPP)

Mr. Liu, who is a widowed, decided to make his Will so that he can leave his estates to his love ones according to his wishes. He went to his lawyer to get the Will drafted. He drafted a simple Will that is just to distribute in equal share to his 2 sons. The lawyer was very professional and got the Will drafted. Mr. Liu was very please with himself that everything is in place and is confident that the 2 sons will not squabble over his (not much) wealth when he leave this world. He decided to call his best friend, Mr. Kiang, for coffee and shared what he had done so that his best friend knew he had drafted a Will and hope he can assist his family if needed.

Mr. Liu told his friend,” Bro, I did a Will and everything will be divided in equal share between my 2 sons. It will be a fair and equal share so they will not squabble over unfair treatment.”

Mr. Kiang asked Mr. Liu, ” Do you think it is a fair and equal share that will leave them happy with each other?”

Mr. Liu was surprised with that question. Afterall, what can be more peaceful and fair than an equal share among 2 sons? Mr. Kiang continues,” Bro, your elder son is married  and staying with his wife in their own house and your younger son is single staying with you. By getting 50/50 of your house, what do you think they will do with it?”

Mr. Liu replied,” Most probably my elder son will want to sell it since he has his own house and take 50% of the proceed while my younger son will want to continue staying in it.”

Mr. Kiang asked again,” What will happen?” And there was silence…

The above scenario might be a situation when a person speaks to a legal professional to get a Will drafted and when the estate planning is done with an Associate Estate Planning Practitioner(AEPP) before getting the Will drafted.

An AEPP is not there to influence your Will but to give you a scenario of “What-if”, highlight the possible hiccups if the estate is distributed in a certain manner and most importantly, to provide a solution if your estate distribution face a potential issue (such as the case of Mr. Liu).

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I am glad to be certified as an Associate Estate Planning Practitioner after procrastinating for a few years due to busy schedule. I hope my knowledge and skills gain in this course and the financial planning experience accumulated over the years will help to provide a better service and advice to my clients.

 

 

 

What is the difference between an administrator and a trustee in a will?

Read here for a simple explanation of an administrator and a trustee.

What is the difference between an administrator and a trustee in a will?

Insurance nomination made better for Muslim

There are three ways to transfer the proceeds of an death benefit to the beneficiaries. It can be done thru’ wills, irrevocable nomination & revocable nomination. The method of nomination is more cost effective than having a will.

My Muslim friends and clients had always face an ‘hidden risk’ when it comes to estate distribution especially on insurance. They had assumed ,if no nomination was made, the spouse and children will get the proceeds for the insurance policy since it was purchased for the benefit of the immediate family members. However, under the estate distribution as dictated by Syriah law , it is highly possible that the majority of the proceeds end up with the deceased’s male siblings and children, leaving very little to the distraughted wife.

Likewise, under Syriah law, there is only a small percentage of an Muslim’s assets that can be willed under the common law. A non-Muslim can choose to nominate his/her beneficiaries under revocable nomination. The advantage of this nomination is the nominee/beneficiary can be change as many time as the policy holder wishes to change. However, a Muslim cannot do that and can only make an irrevocable nomination. The problem with the irrevocable nomination arises when a divorce take place. The former spouse can choose not to give up his/her right as an nominee and there is nothing the policy holder can do.

A new fatwa takes effect on 22nd March 2012. It allows Muslim to nominate under revocable nomination. But for those who had already nominated their spouse as beneficiary still face an uphill task if they want to change it to revocable now. They will need to spend sometime explaining to their spouse that they have to give up their rights before they can nominate under revocable nomination.

A detail report is shown below and for those who wish to know more about revocable & irrevocable nomination can read my previous post. Feel free to share this with your friends and drop me a mail if you need any info.

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Conference on estate planning for Muslims

There has been two significant developments affecting the financial and estate planning for Muslims since the Muslim Financing Planning Association (MFPA) had its inaugural successful conference in July 2009

  1. the passing of the Insurance (Amendment) Act 2009 and the amendments to Section 111 of the Administration of Muslim Law Act (AMLA) which gave rise to concerns in the insurance industry on the ability of Muslim life insurance policyholders to make revocable nominations
  2. the judgment of the Singapore Court of Appeal in March 2009 in Shafeeg’s case on the applicability of rights of survivorship to real
    property held by Muslims as joint-tenants.

These developments will be discussed in depth at the MFPA 2010 Conference.

MFPA as a concerned group will examine the dynamics between the Syariah and secular principles on these and related matters.

For more information about MFPA, please visit www.mfpa.org.sg.
For more information about this Conference, please visit www.intellitrain.biz/MFPA.

Click below for conference brochures and registration form.

  1. Brochure
  2. Registration Form

(Source: MFPA)

The New Nomination of Beneficiares Framework

I had reviewed serveral policies in my 10 over years of practice and one of the issues with insurance policies was the Section 73 of the conveyancing and Law of Property Act or commonly known as the Section 73. An insurance policy is deem to be issued under Section 73 as long as you nominated your spouse or children as the beneficaries and it automatically becomes a trust policy. What this means is as a policy holder, you have no vested interest in the policy. One of the main concern of this Section 73 is that during a case of divorce, the spouse at the point of nomination is the legal beneficary regardless if you re-married or not.

Good news is that with effect from 1st Sep 2009, there is change to the law on the nomination beneficiaries. There are now two nominations – Section 49L & Section 49M. I shall do a brief explaination of the difference between the two and please drop me an email or contact your financial advisor if you need any clarification.

 

Section 49L

Section 49M

Beneficiary ONLY Spouse/Children. Anyone.
Revocable Only with prior consent from the beneficiary/legal guardian. Yes. Anytime by the Policy owner. There is no need to seek consent from anyone else.
Creditors Creditors has no rights to the death proceed. Creditors has rights to the death proceed.
Will made after nomination No changes Supersede by Will. Nomination deemed revoke.
Death of nominee/beneficiary Policy proceed form part of beneficiary’s estate. Nomination deemed revoke if sole beneficiary dies. Nomination to be distributed proportionally among surviving beneficiaries.
Living benefit                              (e.g. critical illness, TPD) Proceed goes to beneficiary. Proceed goes to policy owner.
Nomination by Muslim Yes Must seek MUIS approval to confirm the distribution is according to Muslim law.