Could one mistake on your life cover application end up costing you R300,000?

Leave your life cover to the wrong person and it could end up costing thousands of Rand’s. Leave it to the ‘right’ person and it costs nothing (Although you’ve got to wonder if the lady in the picture below is the ‘right’ person?).

Maybe you’ve never thought about how much it could cost you. Maybe you didn’t know.
In this article, I’m going to show you what can happen if you get your beneficiary wrong.

And here’s what makes things even worse…the more life cover you take out, the bigger the problem you have. So what then is a person supposed to do?

I’m going to explain what you should do, but before we get there, let’s first find out who is entitled to your life cover proceeds. Now, remember that when I talk about ‘proceeds’ I’m talking about what gets paid out when you pass away. If you take out a million Rand in life insurance, then the million Rand is what we’re talking about.

So who is allowed to inherit?

It’s all up to you. After all, it is your life insurance and you can do with it as you please. But it can be broken down into two options:

• Your estate, or
• Your beneficiary or beneficiaries

In this article let’s take a peek at your beneficiaries. In a follow-up article to this, we’ll look at the cost of leaving it to your estate

• In a previous article, we discussed why you need a will and what happens when you leave your life cover to kids. Unless you have complete faith in their guardian, I strongly advise against this.
• You could also leave the proceeds to someone other than your husband or wife. This person might end up loving and hating you at the same time depending on whether they were expecting to receive a fixed sum of money…just ask Dad in the example below.
• The other person whom you could nominate is your husband or wife or life partner. Let’s start off by seeing what happens when you use this option.

Leaving life insurance to your husband or wife

If you’re married – or in a long term relationship seen to be permanent – this is definitely your wisest option. Nominate them as your beneficiary.
Plenty of times I come across people wanting to leave ‘so much’ to their spouse and ‘so much’ to each of their five children. There’s nothing wrong in doing that, but be careful if we’re talking about lots of money. Get some advice from a financial planner.

Thing is if you leave your assets to your husband or wife – these assets are paid out free of estate duty.

Here’s an example:
Mike takes out R5 million life insurance and nominated Megan, his wife, as beneficiary. This is what happens:

• The life insurance company pays R5,000,000 into Megan’s bank account
• No estate duty is payable
• Megan walks away with R5,000,000 clear and besides the sharks who start circling; she has no further problems.

Leaving life insurance to anyone else besides your wife or husband

The estate duty act allows you to leave R3,5 million to ‘persons’ other than your spouse without paying tax.

Let’s look at John, a single guy with no assets besides his rather hefty life insurance policy.
John takes out R5 million worth of life insurance and nominates his dad as beneficiary. This is how the policy pays out:

• R5,000,000 pays out to dad
• Less the R3,500,000 tax-free amount (They call it an ‘abatement’)
• Equals R1,500,000 and this is taxed at 20%
• Dad now owes R300,000 to the government in taxes
• Dad gets to keep R4,700, 000 of his R5,000,000

To summarise

No-one likes paying for life insurance every month. The gripe we all have is that “we never get to see the benefit of it.”
So imagine – after sweating bullets for 10 or 20 years – your beneficiary ends up getting taxed on what they get paid?

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