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SA's No 1 Insurance Blog

Are your children the beneficiaries of your life insurance?

Do you realise the problems this creates if they’re under 18?

Since they haven’t reached the age of majority (currently 18), they cannot manage their own financial resources.

This means that someone else has to do it for them. That someone else would be the legal guardian, who in most cases would be your ex-spouse. And I’m assuming there’s a perfectly valid reason why you haven’t made them the beneficiary of your life insurance, right?
And if there isn’t a guardian, then there’s always the guardian fund run by the state, and unless you trust them completely, you don’t necessarily want them involved.

What if you don’t want any of the above to happen?

  1. You need to set up a Last Will and Testament
  2. Then you nominate your estate as the beneficiary for the proceeds, and
  3. In your will establish a Testamentary Trust to take care of them until they reach a certain age.

The problem with doing this is…

Your life insurance becomes a physical asset in your estate. The executor of your estate is then entitled to:

  • To settle the debts of your estate with it, and
  • Charge a fee of up to 3, 5% (excluding VAT)

Why not a normal trust instead of a Testamentary Trust?

A testamentary trust is a legal entity which only comes into existence on the founder’s death and which is created for the sole benefit of the founder’s beneficiaries. There are no administration fees payable until the trust comes into being.

An “inter vivos trust” (inter-vivos means “between the living”), is created during the founder’s lifetime and involves a founder, trustees, audits, and all the associated costs thereof.

If the sole purpose of the trust is to take care of minor children; then a Testamentary Trust is an effective way to take care of them. Unfortunately, it’s also not free of charge and does end up eating away a large chunk of their inheritance.

But that’s an article for another time.

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