By Johan Strydom & Fiduciary Product Head
Nominating a beneficiary on a life assurance policy seems like the obvious thing to do. Afterall, it's an easy to understand and straightforward process to nominate someone who should receive the policy proceeds in the event of the policy owner's death. There are, however, a few points to keep in mind before one nominates a beneficiary.
Let's first consider some basic principles:
A life assurance policy is essentially a contract between the policy owner and the life assurance company. This means that the nomination of the beneficiary forms part of this contract. You can nominate an individual(s) or a legal entity, such as a company or a trust as a beneficiary. You can usually nominate more than one beneficiary on a life assurance policy.
Your last valid Will does not supersede your life assurance beneficiary nomination.
All domestic life assurance policies are generally considered deemed assets forestate duty purposes, meaning that all life assurance policy proceeds are estate dutiable, irrespective of whether the policy is payable directly to a beneficiary or to the estate of the policy owner.
Nominating a surviving spouse as beneficiary will qualify for an estate duty deduction in terms of section 4q of the Estate Duty Act.
Where there is no beneficiary nominated, the proceeds of the policy will be payable to the policy owner's deceased estate and distributed in the terms of the deceased's last Will.
When choosing a beneficiary, it is essential to consider what the original purpose or intention with the life assurance policy is. In general, it would make sense to nominate a beneficiary as it allows for the quick payment of the policy proceeds to the beneficiary as opposed to the payment to the deceased estate. In addition, considering that deceased estates take a long time to be finalised, paying the proceeds to the estate could delay payment of much needed funds to family members and other beneficiaries. However, if the intention was to create liquidity in a deceased estate to enable the executor to settle outstanding liabilities, claims, and estate administration expenses, then it would make sense to make the policy proceeds or a portion thereof payable to the estate. Many policy owners unfortunately nominate a beneficiary on their life assurance policies without considering the liquidity requirements in their estates. This is often done to save on the executor's fees (currently 3.5% excluding VAT) levied on the policy proceeds if payable to the estate. Keep in mind that if your intention is that the policy beneficiary uses the policy proceeds to settle or partly settle estate expenses, then you must ensure that the policy beneficiary is an heir in your Will and deceased estate.
This unfortunate confusion between policy beneficiaries and estate heirs often leads to family disputes and a problematic and a lengthy estate administration process. Another common issue is where a minor child is nominated as a beneficiary. Proceeds from life assurance cannot practically be paid to the minor and will be paid to the minor's legal guardian or to the Guardian's Fund. Rather consider nominating a trust created for the benefit of the minor child as the beneficiary to ensure that the proceeds of the policy are protected and available for the beneficiary benefits.
FNB Fiduciary (Pty) Limited Registration Number 1986/003488/07- A subsidiary within the FirstRand Group of Companies. An Authorised Financial Services Provider.
