It’s important to choose the beneficiaries of your life insurance policy with care, especially if they’re minors. Having a life insurance policy is a great way to financially protect the people you love.
You’ll pay a monthly premium and, in the event of your passing, your beneficiary will receive a lump sum payout. You can choose whoever you want to be your beneficiaries (yep, you can choose more than one) and it could even be your favourite charity. Either way, it’s important to consider this carefully.
Choose someone you trust
When it comes to choosing beneficiaries, most people pick those who rely on them financially, like their spouse, children, or even elderly parents. Most life insurers will be hesitant to offer you a life insurance policy if you’re over the age of 65, but your beneficiaries can be of any age. Still, there are things you’ll want to know if your beneficiary is a child under the age of 18.
in South Africa, a child can't directly inherit money or assets under the law. Instead, a legal guardian would manage any money they receive until they turn 18.
If you consult a financial advisor, they might suggest setting up a testamentary trust in your Will to ensure your children receive the money from your life insurance policy. This type of trust is created after you pass away and your life insurance payout can be paid into it. You’ll be able to appoint a trustee, literally someone you trust, to take care of this money until your child celebrates their 18th birthday, or an age of your choosing, and can manage it themselves.
A bit about splits and changes
It's always a good idea to check your life insurance policy every year or after important life events, like getting married, divorced or the birth of a new child. Remember, you can change your beneficiaries whenever you wish.
You also get to decide how the money from your policy is divided among your beneficiaries. For example, you might want to split it evenly between your children, or maybe give more to your spouse and a little to your parents. It’s completely up to you.
Not choosing a beneficiary is a bad idea
If you have a life insurance policy and don’t’ nominate a beneficiary it gets paid out to your estate. (Your estate is everything you leave behind when you die - your money, possessions, and debts.) In this case, it might take a long time for your loved ones to receive it as winding up an estate is a long process that can take years. In the meantime, your beneficiaries might struggle financially as your bank accounts are frozen after your passing until your estate is finalised.
Another negative? Any debts you owe could be paid from the life insurance payout that ends up as part of your estate. This is why it’s a better idea to choose beneficiaries as they'll be paid as soon as the claim is approved, usually quite quickly.
The bottom line
Having a life insurance policy is a wonderful way to create a financial safeguard for your family but it’s important to pick the right beneficiaries, especially if you have children under the age of 18. By planning ahead and choosing wisely, you can protect the people you love and enjoy real peace of mind.
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