There’s an old saying that nothing in life is ever guaranteed except death and taxes. Does that apply to life insurance as well?
Take your home for example – You spend years paying off your bond only to lose everything through no fault of your own. Maybe you lose your job? Maybe you get divorced? Maybe you pass away unexpectedly?
There’s nothing much you can do about losing your home when you lose your shirt, but at least there’s life insurance to take care of that ‘dying unexpectedly’ bit, right?
But what if you owe a lot of people a lot of money?
Peter knew he was in deep trouble. Up to his eyeballs in debt, he’d taken out a second bond on his property to take care of a few odds and ends.
First off was the brand new kitchen which cost way more than they’d bargained for. Then there was the hare brained scheme to buy a second property to replace Jenny’s income. Who would have thought that finding good tenants could be such a problem? Or that each time a tenant moved out, it would cost a fortune in renovations?
To make matter worse, six months ago Peter had been diagnosed with terminal cancer. The only bit of good news was that they’d been forced to take out life insurance to cover their bond. At the very least he could rest easy knowing he’d leave Jenny with two properties and no debts.
That was until he opened a letter from SARS. Basically it stated he owed them R280,000 in outstanding VAT and penalties!
The last six months had been rough for them with every spare cent going to hospital expenses but he’d never realised he was so behind in taxes.
Peter wasn’t too worried about the houses; hopefully they were safe in his family trust. What worried him most was his life insurance…
Could they could confiscate his life insurance?
The answer to that very much depends on who he leaves his life insurance to.
Three scenarios come to mind:
- He leaves the money to his estate so that all his estate expenses can get paid
- He cedes the policy to his bank as security for the amount owed on the bond, and
- He nominates Jenny as beneficiary for his life insurance
Let’s start off by saying that life insurance is useless until a specific event occurs which leads to a claim being paid. Anyone looking for money won’t get a blue cent until then, and in between there is also the risk of you cancelling the policy. This is why someone you owe money to could insist on a security cession of your life insurance. That way you can’t cancel the policy, and you can’t have it paid out to anyone besides them.
Leaving life insurance to your estate
One of the jobs of an Executor is to pay off all of the debts you leave behind. One of those debts is your outstanding taxes.
The first port of call is always whatever cash is still lying in your bank accounts, but don’t forget, life insurance paying to your estate forms part of that cash.
In this instance any and every creditor will have a right to a slice of the pie with SARS on top of the list.
Ceding life insurance to a creditor
In this instance the creditor has first right to a portion of the proceeds equal to the amount owed them.
A quick word on insolvency:
If an individual is declared insolvent, any third party to whom money is owed has the right to recover the amount owed from the life insurance.
In Peter’s case, if declared insolvent, SARS may be entitled to recover the amount owed from his life insurance.
Nominating a beneficiary
This is always the best solution. Nominating a beneficiary means the life insurance pays directly to the person noted on the contract as the beneficiary.
It isn’t paid into the estate so it can’t be used to pay off any of the estate’s debts. However, it could attract estate duty if payable to anyone besides your spouse.
A mistake many make when nominating a beneficiary, is to nominate a minor child as beneficiary. A minor child is anyone below the age of 18.
Leaving money to a minor means it ends up in the Guardian’s Fund until the child turns 18.
Life insurance is still the cheapest way to raise money fast. Who else is willing to give you a million Rand after paying only one instalment?
Consider these two points:
- Rather buy more life insurance than what you think you need. Buying a million Rand’s worth of life insurance only to cover your debts doesn’t take into consideration all the other unexpected costs which might arise. Think medical expenses. Think Executor’s fees. Think taxes. Think ‘tide me over’ money to help your family get back on their feet.
- Always nominate an adult as beneficiary wherever possible. The beneficiary can then decide on how they wish to settle your debts.
Of course, none of this means anything if you don’t have any life insurance in the first place.
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