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When someone is nominated as a beneficiary in respect of the death benefits on a policy of long-term insurance, the advantages and disadvantages must be weighed up carefully with your financial planner before a final decision is made. Should a planholder (policyholder) fail to nominate a beneficiary, the proceeds will pay to the planholder’s deceased estate.

Advantages

  1. As soon as the claim has been admitted, the death benefits are paid out immediately to the beneficiary.
  2. The proceeds of the policy are not subject to executor’s fees and the claims of estate creditors. (However, there must be sufficient cash in the estate or otherwise available to pay estate expenses and debts, in order to avoid the forced sale of estate assets to cover cash shortfalls).
  3. The planholder (policyholder) may nominate beneficiaries of his or her own choice, notwithstanding his or her marital status and marital regime. [Refer to the judgment of Mbha JA of the Supreme Court of Appeal in V. Naidoo v Discovery Life and 4 others (2012/2017) ZASCA 88 dated 31 May 2018.]
  4. Unless a planholder has ceded a policy outright to a third party, he/she may deal with the policy freely during his/her lifetime. The policyholder may cancel a beneficiary nomination at any time and nominate a new beneficiary if he or she chooses.

Disadvantages (no beneficiary nominated)

  1. An estate will take at least 3 months to wind up and, on average, will take at least 6 months to distribution.
  2. If the planholder is married in community of property, the proceeds vest in the joint estate and obviously the surviving spouse has a claim to at least half of the proceeds.
  3. The proceeds paid to a beneficiary are not protected by a testamentary provision that such proceeds are excluded from the beneficiaries’ joint estate. Nor do the proceeds qualify as an inheritance, which would be excluded from the accrual calculation.
  4. In the event of marriage or divorce, nominations of beneficiaries on policies are often not cancelled. This creates a major risk. Marriages, divorces and amendments of wills do not automatically replace beneficiaries on policies, and the planholder must personally register the cancellation of a beneficiary and the nomination of a new beneficiary with the insurance company. It cannot be done after his/her death. Insurers only pay out to the estate or the beneficiary/beneficiaries on their records.
  5. Payments made to beneficiaries who reside abroad and who wish the funds to be transferred there, are not automatically exempt from exchange control regulations. Inheritances that are transferred from the estate are automatically exempt. Payments made to beneficiaries on policies do not qualify as inheritances and the normal, sometimes strict, exchange control measures therefore apply in instances where, for example, the beneficiary resided in South Africa when the nomination was made, but is residing abroad at the time the death benefits are paid out.
  6. Payments may not be made to beneficiaries who are incapable of managing their own affairs (for example, suffering from Alzheimers or Dementia) or who are insolvent. In this case, the payment must be made to the curator bonis (person appointed by the court to take care of the estate of a person who suffers from a legal incapacity) or the trustee of the insolvent estate, respectively. (If the proceeds are payable to the testator’s estate, a testamentary trust could be used to provide for such circumstances.)
  7. Payments may not be made to minor beneficiaries (persons under the age of 18), but only to their natural or legal guardians or, in the absence of guardians, to the Guardian’s Fund of the Master of the High Court. If payment is made to a guardian, there is a risk that it might be invested in risky assets or not used to the benefit of the minor. The statutory Guardian’s Fund will distribute the funds to the minor when he/she turns 18. However, it can be stipulated on the beneficiary nomination form that if the benefits devolve upon the beneficiary whilst he/she is still a minor, the proceeds must be paid to the Sanlam Trust Guardian’s Trust. Funds will then be available immediately for the minor’s needs once a claim is admitted and the capital is professionally administered to the benefit of the minor and in such a way as to protect him/her. Alternatively, the testator who wishes to nominate a minor as beneficiary could state this in his will and stipulate that the proceeds be administered in trust until the age indicated by the testator or the trust deed. However, in the latter case the proceeds will attract executor’s fees.
  8. If the nominated beneficiaries have already died, the proceeds will pay to the deceased estate of the planholder – not the beneficiary. It will fall into the residue of the estate. The beneficiary’s executor and heirs have no claim to the proceeds.
  9. The proceeds are not available to pay estate debts, taxes and expenses, which can be onerous – in particular, given that parliament recently increased Master’s Fees and estate duty. SANLAM TRUST reduces executor’s fees to 1.5% on the proceeds of long-term insurance policies that are paid to the estate in order to settle estate liabilities – provided this instruction is noted in the last will and testament (NB).

Nominating a beneficiary on a policy and ceding a policy to someone are two completely different actions. When a policy is ceded outright to someone that person becomes the policyholder and he/she may deal with it as he/she thinks fit – including nominating beneficiaries!

The proceeds of long-term insurance policies are subject to estate duty as ‘deemed property’ in the estate of the life insured. It makes absolutely no difference whether beneficiaries are nominated or not. The same rule applies to policies ceded outright, where the original policyholder is the life insured on the policy, and dies.

Consult your professional financial planner on all these issues without delay.

Article edited and rewritten by David Thomson, Senior Legal Adviser, Sanlam Trust.

 

 

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