Checked your life insurance recently? Find out why you should!

Jeremy is recently divorced and has just started dating again. This has gotten him thinking about his future and the care of his minor daughter, Hannah, who is under the age of 18 years. Jeremy is reminded that his ex-wife is still the beneficiary of his life insurance policy and makes a mental note to contact his insurance broker to revoke his ex-wife and nominate Hannah as his beneficiary in the event of his death to ensure that the proceeds of his policy are paid out to Hannah.

But what will happen if Jeremy passes away before he has the opportunity to change the beneficiary on his life insurance policy? Will the proceeds of Jeremy’s policy be paid to his ex-wife and will his minor daughter, Hannah, be left without any rights to the proceeds of this policy? The reality is that circumstances like these often occur in practice and in many cases result in unforeseen and even unfortunate consequences. In this case, the proceeds of Jeremy’s policy would have been paid to his ex-wife and not to Hannah.

But let’s say Jeremy did get the chance to revoke his ex-wife and nominate his daughter as beneficiary on his insurance policy so that she would receive the benefit upon his death. The question now is, as a minor, would she be entitled to receive the proceeds? The general position in South African law is that benefits accruing to a minor would be paid over to the Master to be retained in the Guardian’s Fund until the minor reaches an age of majority. Life insurance policies however differ in that the insurer will pay the proceeds directly to the minor regardless of his/her age. In reality, this means that the minor’s legal guardian will generally administer the money on their behalf, unless the guardian is illiterate, in which event the insurer could decide to rather pay the proceeds to the Guardian’s Fund. Accordingly, in Jeremy’s case, Hannah’s legal guardian would thus be entiteld to administer the proceeds of the insurance policy on behalf of Hannah, and where the guardian is the natural mother, it could mean that Jeremy’s ex-wife again has control over the proceeds, even though she is no longer a beneficiary of his policy.

A trust can be a useful tool for Jeremy to solve this conundrum. A testamentary trust, created in Jeremy’s will or even a family trust established by Jeremy during his life, can be nominated as the beneficiary of his insurance policy. The insurer will then pay the proceeds to the trust and not a specific person, to be administered by the trustees of the trust for the benefit of the beneficiaries of the trust. In his will or family trust, Jeremy can then nominate Hannah as the beneficiary of the trust as well as determine who the trustees of this trust should be.

Another aspect Jeremy should be aware of when reviewing his life insurance policy, is the difference between revocable and irrevocable beneficiary nominations. In the case of a revocable beneficiary nomination, the beneficiary of a policy can be revoked without the consent of the beneficiary being required. In the instance where Jeremy’s ex-wife’s nomination in his policy is revocable, he can revoke her as a beneficiary without her consent being required. However, with irrevocable beneficiary nominations you can only change or revoke a benefit with the express consent of the beneficiaries. The reason being, these beneficiaries have aquired rights the moment they accepted their nomination in writing, and accordingly these rights cannot be changed unless they expressly consent thereto, unless the policy expressly stipulates otherwise.

Lastly, Jeremy should note that if he fails to nominate a beneficiary, the proceeds of his insurance policy will be regarded as an asset in his estate upon his death and will be paid to his estate for division according to his will or the rules of intestate succession if he has left no will.

When we are confronted with all the possible implications flowing from Jeremy’s example, it is clear how important the decision as to beneficiaries in your insurance policy is as well as how important it is to regularly review your policy and beneficiaries. What is also clear is that with proper estate planning you could also limit some of the risk of changing circumstances and it also remains important to consult an experienced estate planner when planning for the future.

September 27, 2012
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