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Many South Africans who pass away do not leave behind enough money to cover their debt. This ultimately reduces the amount their heirs can inherit, sometimes by a lot! Life insurance can help you and your loved ones protect your policy pay-out from your creditors. But there is one very important step you need to take!
How to protect your policy pay-out from creditors
Few people are aware of the immediate financial consequences of death and don’t provide for the financial difficulties their families often experience during what is already an extremely difficult and emotional time. For your family this can mean a double blow. Not only do they lose you, your emotional support and your income, but they might also have to deal with your creditors and their demands for payment of outstanding debt. The last thing a grieving family needs is calls from persistent debt collectors and lawyers.
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The good news is that your life cover is safe from creditors – provided you nominate a beneficiary who will receive the pay-out from a valid claim.
If you don’t nominate a beneficiary the lump sum pay-out will go into what is called ‘your estate’ which is subject to probate. Probate is a legal process for administering the estate of someone who died and can take a great deal of time.
During probate, anyone who is owed money can file a claim with the court requesting payment from the assets in the deceased’s estate. The executor, or person managing the estate, pays as many of the valid claims as possible out of available assets before the family gets what’s left.
However, because certain assets such as a life cover policy pass directly to beneficiaries outside the estate, they are not subject to creditors’ claims against the estate of the person who passed away. Retirement annuities are another example of assets which when left to a beneficiary are usually protected in the same manner.
A life insurance pay-out is tax-free
Another important cash flow benefit of a life insurance policy is that the lump sum pay-out for a valid claim that is received by the beneficiaries upon your death is tax-free. Your beneficiaries can be certain of the amount they will receive and know that there will be no taxes deducted from the sum assured.
And it can cover the costs of winding up your estate!
Your life insurance policy works really hard for your family! A life insurance policy that pays out a cash lump sum on death directly to your nominated beneficiary can also be used to cover the costs related to winding up your estate such as taxes and executor fees. In fact, most financial advisers regard a life insurance policy as one of the most important aspects of financial planning as it enables your family to settle costs that may unexpectedly become due upon your death.
Top tip: The 1Life Wills and Estate Plan pays out up to R10 million to cover estate shortfalls. It includes a 6-month income benefit to help your family pay living expenses while the estate is wrapped up. It also provides a valid online will specific to your needs.
Make sure your family benefits, not your creditors or the tax man
1Life’s Pure Life Cover pays out a lump sum for valid claims for the sum assured stated on your policy schedule. Nominate a beneficiary and you can be sure that funds are available to your family to cover immediate expenses and to build the future you always wanted for them. If you haven’t nominated a beneficiary or want to update your beneficiary details, you can simply log on to the online policyholder portal to make the changes quickly, conveniently and in your own time.
Published on: 10 November 2015
Updated on: 17 November 2023