Why is naming beneficiaries on a life insurance policy so important?
Posted on 25 Oct, 21 by BrightRock
Your beneficiaries will receive the money from your life insurance when you pass away
When you take out a life insurance policy, you need to choose who will receive the insurance pay-out when you die. The person who receives the money from your life insurance policy is your beneficiary, and you can even name more than one beneficiary. Deciding who to choose as your beneficiaries is a very personal decision and different people will make different choices, based on their individual situation. Most people choose a close family member, such as their spouse, their life partner, their children, or their parents, as their beneficiary.
You can nominate anyone you choose to be your beneficiary
When considering who to nominate as beneficiaries, most people choose people who are financially dependent on them. You can nominate any adult over the age of 18 years to be your beneficiary. You can also nominate a child under the age of 18. However, it’s important to understand that, under South African law, a child doesn’t have the legal capacity to inherit money or any other assets directly. Instead, a legal guardian will need to administer any money your child receives from your life insurance policy until the child reaches the age of 18 years.
Legal experts often advise that parents set up a testamentary trust in their will to ensure that their children will receive the pay-outs from your life insurance policy, or any other money left to them. A testamentary trust is a legal trust that is created on your death. Should you die, any money paid out from your life insurance policy will be paid straight into the trust. The trustees that you have appointed to administer the trust will manage this money in the best interests of the child until they turn 18.
You can choose how you want the pay-out to be divided between your beneficiaries. For example, a 50/50 split between two family members or a 40/20/20 split for your spouse and both your parents.
You can change beneficiaries at any time
It’s a good idea to review your life insurance policy annually or at least after certain important events, such as when you get married. You can change the beneficiaries of your life policy at any time. Simply contact your insurance company or financial adviser to do this.
If you don’t name a beneficiary, the money from your life policy will be paid into your estate
Your estate is all your money and possessions, including your debts, that you leave behind when you die. After you die, your estate has to be wound up, which means that any debts must be paid off and any assets must be distributed to the people who need to inherit from your estate. If the money from your life insurance policy is paid into your estate, it could take many months – or even years – for the money to be paid out to your loved ones. When you have people who depend on you financially, this could mean that they might not be able to keep the same lifestyle as they had when you were alive. Once the money is paid into your estate, if you owe anyone money, they could also claim this debt from your estate. If you do name beneficiaries, however, then they will receive a payment as soon as your death claim gets approved, which is usually quite quick if the death claim is easy to finalise. What’s more, no one else can claim against this pay-out.
A financial adviser can help you
Insurance products can be pretty complicated. Making the wrong decision can have serious consequences for you and your family, so it’s worthwhile to shop around for the best advice. Fortunately, many well-qualified financial advisers can answer your questions, provide clear explanations, and help you understand what you’re buying when it comes to funeral policies and life insurance. Financial advisers must meet strict regulatory requirements and be properly licensed with the Financial Sector Conduct Authority (FSCA) and product providers. You have the right to ask your adviser for their credentials and ask whether they are independent or work for a specific product provider.
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