We get all the money! Just kidding. Deciding on exactly what happens to your life cover proceeds when you pass on is a big decision. The reason you take out life cover in the first place is so that when you pass on, someone stands to benefit. Making a silly error could have dire consequences for your intended recipient.
The obvious option is to nominate a beneficiary, but did you know that your policy could also be ceded or left to your Estate? The implications of your decisions are far reaching, so it’s important that you understand your options upfront, otherwise there could be groot ‘snot en trane’ at claim stage.
Nominating a beneficiary
This is always the best option.
Nominating a beneficiary means the life insurance proceeds pay directly to the person (or persons) noted on the life insurance policy as the beneficiary. You can nominate whoever you like, but a mistake many people make when nominating a beneficiary, is nominating a minor child (that would be anyone under the age of 18). Your life cover proceeds can’t be paid to a minor, so if you have children who you want to benefit from your life cover policy, it’s better to deal with that in your Will document and the specific formation of a testamentary trust.
Beneficiaries can be changed at anytime, and you can split the proceeds of your life cover policy up evenly if you like.
1 x beneficiary stands to inherit 100% of the proceeds
2 x beneficiaries could stand to inherit the proceeds in equal portions of 50% each
3 x beneficiaries could stand to inherit 33.3% each
Monies paid directing to beneficiaries also bypass your Estate and are not dutiable. That moves us onto the implications of not nominating a beneficiary.
Leaving life insurance to your Estate
What happens if I don’t nominate a beneficiary on my life policy?
Benjamin Franklin summed it up when he said: “In this world, nothing is certain but death and taxes” Estate Duty is a bit of a double whammy in that regard!
If you don’t nominate a beneficiary on your life cover policy, the proceeds will form part of your Estate (all the money and property owned by a particular person, at death). When you pass on, all your assets form part of your Estate (your life cover policy included) and dreaded Estate duty (death taxes) might be levied, depending on how large your Estate is.
Over and above death taxes, Executor’s fees (fees charged by the person winding up your estate) could also be charged. Executors fees can be charged on the gross value of your Estate but are fortunately capped at 3,5% (excluding VAT).
How much is Estate Duty?
Estate duty is levied at 20% (25% if you have really big bucks), but lucky for us, SARS has been kind enough to allow a R3,5 million exemption. That means the first R3,5 million of your Estate will not be taxed, but if you left a sizeable life insurance policy to your Estate, it’s easy to see how this could create a tax problem.
Quick Estate Duty calculation example:
- Net value of the Estate: R4,000 000
- Estate duty exemption: R3,500,000
- Dutiable portion R500,000 x 20% Estate duty
- Estate duty payable: R100,000
Forgetting to nominate a beneficiary on your policy could mean handing the Government additional bucks, without you even knowing about it, and hopefully you have a valid and up-to-date Will document to give the Executor of your Estate some instructions.
Ceding life insurance to a creditor
Be careful with life cover policy cessions. You are legally transferring the portion of your life cover to be used as collateral if you can’t pay your debts – you hand legal ownership and rights of your policy to a third party. The cessionary will always take what’s due to them first (regardless of who is nominated as a beneficiary) and if there is anything left, it will probably land up in your Estate (and that could take months to finalize).
Banks love policy cessions and will be quick to ask you to “cede” your life cover policy over before they can finalize your finance for a bond or personal loan. This isn’t always necessary and should be avoided at all costs. Even years down the line, when you’ve paid your dues, getting a policy cession removed by a bank is so much work, you will be ruining the day you decided to sign that cession document in the first place.
- Nominate a beneficiary
- Don’t nominate a minor
- If you don’t nominate a beneficiary, understand that the money will pay into your Estate
- Estate duty will be levied at 20% after the exemption of R3,5 million
- Try and avoid ceding your life cover policy
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Until next time.
The Wise About Life team