Your client has taken out life insurance to provide for your family should the worst happen. But unless you have also provided the life insurer with a list of beneficiaries, their loved ones may be left to struggle financially for many months before receiving a death benefit.
Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA), explains that should someone die without having nominated beneficiaries, the life policy will pay the death benefit to an estate.
“The family will then have to wait for your estate to be finalised before receiving any payments. This could take between six months and two years.”
Since your bank accounts will be frozen upon your death, this could severely impact the family’s immediate ability to access any funds to support themselves he adds.
Dempsey says another important reason to nominate beneficiaries is to protect death benefits from creditors and fees. Any outstanding debts would need to be settled before the estate will pay out, which could significantly reduce the amount of money that will finally go to beneficiaries. The proceeds of a life insurance policy will be deemed as property in the estate for Estate Duty purposes, and this is calculated at a further rate of 20 per cent of the net amount over R3.5 million after settling any debts.
Should your the policy pay into your estate, this money will also be subject to the executor’s fees (a maximum of 3.5 per cent plus VAT).
“If, however, your client nominated a spouse as beneficiary, the death benefit would be paid directly into a partner’s bank account. This can happen within days following a claim, provided there was no cause for suspicion or further investigation,” he states.
He adds that as long as you have not ceded the life policy to cover a loan or mortgage bond, your policy will also be exempt from claims by your creditors, meaning that your family will receive the full payment amount you had intended.
“Finally, you must also remember that beneficiaries under the age of 18 years may not receive assets from your estate or payments from your life policies. You need to consider the fact that this money will instead be paid into their guardian’s bank account,” cautions Dempsey.
“If for any reason you do not want your child’s guardian to have control of their assets, for instance in the case of an ex-spouse, you need to specify that the money should be paid into a trust that is to be formed upon your death. You can then nominate trustees to manage the trust for the well-being of your child,” he explains.
He states that the harsh reality is that the unexpected can and does happen every day, and while you may have travelled gently into that good night, your loved ones will have to live with the consequences of your planning.
“Although unpleasant, asking the difficult questions and attending to the details is therefore a profound act of love for the people you would leave behind. And taking the necessary action to check your policies without delay could mean the difference between sinking and swimming for your family,” he says.
Therefore, make contact with your financial adviser today to either nominate beneficiaries or, if you have previously done so, to review your beneficiaries. It is advisable to check the beneficiaries on your life policies once a year to ensure that they are still in keeping with your wishes. If your beneficiaries are children, you need to carefully consider what will happen to the money and ensure that they will be provided for.
And whilst you are speaking to your financial adviser, Dempsey suggests that you also check on the following:
- Are you adequately covered? The amount of life and disability cover needed will depend on your family’s lifestyle and circumstances, which will change over time. A trusted financial adviser will be able to guide you in ensuring that you have the appropriate type and amount of cover, which you should review together annually.
- Do you have a will? Consult your financial adviser, lawyer or life insurer for assistance if you do not yet have a will, and review this again each year to ensure it is up to date. Dying without a will would place a huge financial, legal and emotional burden on your loved ones, for instance as any physical assets would become part of your estate and likely need to be sold in order to share the proceeds among your dependants fairly.
- Do you have an emergency contact list? In the event of an emergency, leave your family a clear roadmap to help them navigate your affairs more smoothly. Create a list with the details of your financial adviser, life and disability policies, medical aid, short-term insurance, investments and any outstanding debts. Make sure that your family knows where this list is and that it is kept up to date.