MISTAKES TO AVOID WHEN NOMINATING BENEFICIARIES

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Ashley Percival, CFP®

The nomination of beneficiaries on life assurance policies is an important, but often neglected consideration in the financial planning process. Failure to nominate a beneficiary or nominating the ‘wrong’ beneficiary can have serious financial and other unintended consequences for your loved ones.

Common mistakes

Failure to nominate a beneficiary

By having a nominated beneficiary, the life assurer can pay out policy proceeds outside an estate in the event of death. Proceeds reach beneficiary(s) much quicker than having to wait for the estate to wind up (which could take years).

Failing to nominate a beneficiary requires the life assurer to pay the proceeds of the policy to the estate. It means that the executor must deal with the policy proceeds and the estate incurring unnecessary executor fees. This can be as much as 3,99% on the value of the policy which can be particularly significant. For example, on a R5 Million pay-out executor fees could amount to R199 500.

 

Nominating a minor as beneficiary

A child under the age of 18 years is regarded as a minor which means that the child’s guardian will be legally entitled to take possession and administer policy proceeds on the child’s behalf. This could prove problematic if you are for example divorced and may not necessarily want your ex-spouse to have free access to your child’s money.

If you have minor children, setting up a testamentary trust is generally a good idea. You can make the trust the beneficiary of your policy and your child the beneficiary of the trust. The trustees of the trust will administer the money until your child is old enough to legally do this on his/her own.[i]

 

Misconception about retirement benefits

There is a common misconception that retirement fund benefits will be paid to nominated beneficiary(s) in the event of death. However, in the case of retirement funds[ii] a beneficiary nomination acts more like a “letter of wishes” as legislation leaves the trustees of the retirement fund with an obligation to establish who the deceased’s actual dependents are. The nomination of a beneficiary will only act as a guide for the trustees helping them understand whom the deceased would like to benefit and who his/her dependents might be.[iii]

 

In closing

Revisit your beneficiary situation when you review your insurance policies or when your circumstances change[iv]. Make sure that the ‘wrong’ party does not end up with the proceeds of your life policy; it could be detrimental to the financial wellbeing of your loved ones.

 

[i] http://www.lifeinsurance-southafrica.co.za/what-is-a-beneficiary

[ii] Pension fund, provident fund or retirement annuity fund.

[iii] http://www.capetalk.co.za/articles/2713/3-mistakes-to-avoid-when-nominating-a-beneficiary

[iv] E.g. at the birth of a child, should you get divorced etc.

 

 

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