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You can choose anyone to be a beneficiary on your life policy – your spouse, your children, your estate or a trust – as long as you have an insurable interest. But how do you know that you are choosing the right beneficiary and that the funds will be used as you intended? It’s a tough question, but we’ve got the answers right here.
Who is a suitable beneficiary?
Suitable beneficiaries will know you and your family, why you took out life insurance and how to use the pay-out. They may be a spouse, partner, or close relative.
In addition, suitable beneficiaries are:
Responsible and trustworthy
You are trusting your beneficiary to act according to your wishes, so you need to know that they are responsible individuals who will spend the money as you intended.
Money savvy
A suitable beneficiary will be good with money, and ideally have a track record of managing money well.
Well supported
Suitable beneficiaries will use financial advisers to help them manage finances responsibly. Life insurance pay-outs are usually large amounts, and your beneficiary will need help investing the money so that it can be used as you intended.
Who is an unsuitable beneficiary?
Unsuitable beneficiaries won’t spend the money as you intended, or there may be legal complications that delay or reduce the pay-out.
Unsuitable beneficiaries can include:
Your estate
Life insurance proceeds are paid directly to the named beneficiaries’ bank account. If this is a person, such as your spouse, it means the pay-out is not taxed, and the funds are immediately available and can be used to pay expenses and/or invested.
However, if a life insurance pay-out is paid to your estate, the pay-out becomes part and parcel of the assets of the estate. This can result in delays in your beneficiaries receiving money as the estate has to account for all assets before it can pay inheritances. Furthermore, the estate has to use the assets to pay any debts and taxes before paying inheritances, which may mean the assets available for distribution may not be as much as you or your family were expecting.
Minor children
Children under age 18 cannot legally inherit in South Africa. Any inheritance they receive is paid into the Guardian’s Fund, and only paid to them when they reach 18 years. Until this time, only the interest earned on the inheritance and R250 000 of the capital amount inherited can be used. You can, however, set up a trust in your will to administer the pay-out for minor children.
If the life assured had more than one spouse or partner, where there are minor children with different legal guardians, then 1Life will open a Trust Account on behalf of the guardians. In the case where there is one legal guardian with several children, a 1Life Umbrella Trust Account with ABSA will be opened, allocating different percentages to the minors, as stipulated in the will.
Naming more than one beneficiary and not specifying the amount or percentage each beneficiary should receive
This causes delays as your insurer won’t know how much should be paid to each beneficiary. Make sure you specify an amount or percentage for each beneficiary.
Too many beneficiaries
Naming too many beneficiaries can also delay payment because your insurer has to find each beneficiary and confirm their identity and bank details. 1Life allows up to 10 beneficiaries on a life cover policy.
What happens if you don’t name a beneficiary or the named beneficiary has passed on?
In this instance, the pay-out will be paid to your estate, which can result in delays.
Two top tips:
1. Update your beneficiaries when your circumstances change
A beneficiary may pass on, you may marry, divorce or remarry or your children may reach age 18. You should check your life insurance policy at least once a year to make sure your list of beneficiaries is correct.
2. Tell your beneficiary the details of your life policy
Your beneficiary needs to know:
- That they are a beneficiary, and of any other beneficiaries on the policy
- Why you took out the insurance so they know how you would like the pay-out to be used
- How much cover you have, and if there are any exclusions and/or waiting periods
- Where the policy document is, as well as your ID (they will need this for the claim)
- Your life insurer’s contact details
- Claim procedure details – including contact details and how to claim
Share the responsibility
Beneficiaries have a big responsibility, so it really is important to choose the right beneficiary and prepare them for how they should spend a pay-out when the time comes. Do this, and there won’t be any unnecessary delays in paying valid claims, and your loved ones will be taken care of.