One of the things that you’re likely to do in your life to secure your future and that of your loved-ones is to take out life insurance. Life insurance is there to protect your income and the assets you’ve worked so hard to acquire should you become seriously ill or injured, or worse, die.
But how do you go about choosing beneficiaries for when that unfortunate event happens and you pass away? Your beneficiary is the person or entity that’ll receive the proceeds of your life insurance policy should you die. This could be a person, company or a trust. For example, if you’ve created a testamentary trust in your will for your children, you can nominate the trust to be the beneficiary of your life insurance policy.
If you have ceded your policy, the life insurance policy will pay out to the cessionary – that is, the person or institution you’ve ceded it to. A cession is when you transfer your rights to the proceeds of your policy to another party. For example, if you a buy a home using a home loan from a bank, your bank will most likely ask you to take out debt cover for your home loan. So if you were to die, your bank would be the cessionary and the life insurance company would pay them the outstanding balance on your home and your loved-ones would get to keep that home. If your debt is paid off and the cession no longer applies, then your beneficiaries will receive the proceeds.
What to consider when choosing your beneficiaries
The type of life insurance you have bought will inform the beneficiaries you’ll choose for that cover. There are many ways to structure how much your beneficiaries will be paid and you can also choose multiple beneficiaries for the same policy. You can take out lump-sum cover that will pay-out money to your spouse and children should you die. You can also take out cover that will pay-out a recurring amount every month to take care of your spouse and children should you die. For example, you can choose your spouse and children as beneficiaries on a policy that will pay-out R10 000 a month to them. While your underage children might be beneficiaries on this policy, according to South African law, the money would go to their legal guardian to help take care of them.
The case becomes a little more complicated when you’re not the policy owner, and the insurance policy is owned by your employer or another entity. Many companies have group life cover for their employees, which pays out should the employee become seriously ill, injured or die. In this case, an insurance company would first pay the company and they would then pay out your nominated beneficiaries. In the case where you belong to a pension or provident fund that offers you life cover through a group risk scheme, the trustees will use your beneficiary nominations as a guideline for deciding who must receive the pay-outs from this policy if you die. However, if you have nominated someone other than your financial dependants to receive the pay-outs on your death, the trustees may pay your dependants rather than your nominated beneficiaries. This is in line with Section 37 C of the Pension Funds Act.
Things like estate duty (a tax levied by the South African Revenue Services on a deceased’s assets) also play a role when choosing beneficiaries. The first R3,5 million of an estate’s value is exempt from the 20% estate duty deduction. SARS does, however, have a right to recover the estate duty from your insurance policy should you die if you have assets that are more than R3,5 million. That is why it is important to plan appropriately with your financial adviser so that your beneficiaries don’t end up receiving less money than you were intending after your death.
