Why is it important to name beneficiaries on your life policy?

Key takeaways

  • If you name a beneficiary or beneficiaries on a policy, benefits can be paid directly to them rather than into your estate. 
  • Your estate may take a long time to wind up delaying the payment to family members or heirs who may need the money. 
  • If benefits are paid to your estate, the executor of your estate will charge fees on the money. 
  • Benefits paid directly to a beneficiary could attract estate duty if your estate exceeds the estate duty exemption.  
  • It is important to remember to keep your beneficiaries updated when there are births, deaths or divorces in your family or benefits may not be paid as you wish. 

 

When you take out life cover, you should name beneficiaries who will receive the benefits of the policy should you die while the policy is in force.  

This makes it possible for your benefits to be paid out quickly to your family or dependants who need the money.  

If you fail to name a beneficiary, your policy benefit will be paid into your estate when you die.  

Estates can take many months, even years, to wind up but eventually the money will then be distributed in line with your will, or, if you don’t have a will, in line with the law of intestate succession. 

The life policy benefits will most likely be included in your estate for estate duty regardless of whether the amount is paid to your estate or not. There are only a few exceptions to this rule. One is when the benefits are paid to your spouse. In this case the benefits will be included in your estate but a deduction equal to the amount will be allowed, effectively making the amount free of estate duty. 

If the benefits are paid into your estate, however, they will attract executor’s fees. If you have named a beneficiary and the benefit is be paid directly to that beneficiary without any work involved for the executor or an attorney acting on his or her behalf, you may be able to avoid fees on the policy benefit. 

Keep beneficiaries updated

Once you have nominated beneficiaries on a policy, it is important to keep your beneficiaries updated. 

After any major life event, such as the birth of a child, a marriage, a divorce or if one of your beneficiaries passes away, remember to update your policy. 

If one of your beneficiaries dies and you haven’t removed his or her name from your list of nominated beneficiaries, their portion of your life insurance benefit may be paid into your estate when you die, unless the beneficiary nomination form states otherwise. 

It is a good idea to check and update the beneficiaries you have nominated at least once a year.  

While you’re free to appoint anyone as a beneficiary, you should consider every family member and person who is financially dependent on you to ensure they continue to be cared for financially after your death. 

You can also name more than one beneficiary. If you choose more than one, you must decide on the percentage of the benefit that you want each of them to get.  

 

Word of warning

Be careful about naming a minor as a beneficiary: If a beneficiary you name is still minor when you die, the policy benefit will be paid to your minor child’s guardian, to a trust set up for the child or to the Guardian’s Fund.  

Consider who your child’s guardian is, especially if you are a single parent or a divorcee, and whether that person is capable of managing the money for the benefit of your child 

In these cases, it may be better to have the money paid to your estate and to provide in your will for a testamentary trust to be set up. The trust will need to have trustees in place before the benefit can be paid.