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Have you chosen the right beneficiaries for your life policy?

12 April 2021
4 minute read

Happy mother with kids

When that big insurance pay-out lands in the beneficiary’s bank account, it might be tempting to go on a bit of a spending spree, or loan money to relatives, or invest in a friend’s business. Even a big lump sum can be depleted pretty quickly if your chosen beneficiary isn’t careful with the cash. Your life insurance pay-out should be managed by someone who will be sensible and savvy with the money and use it to take care of your loved ones as you intended. That means choosing your beneficiary with care.

We look at the important things to consider when deciding who to name as a beneficiary on your life policy and offer some tips on how to help your beneficiary spend an insurance pay-out wisely.

You are free to choose any beneficiary
“You can nominate whoever you want as the beneficiary on your life insurance policy,” says Nathan Philander from Law for All. He says most people will nominate someone who they feel needs to be looked after financially once they have passed. But there is no obligation to choose a financial dependent. Even if you are married with children, you don’t need to nominate your spouse or children as beneficiaries.

The only exception is if you have a legal agreement that requires you to take a policy for a specific reason. For example, a divorce agreement might stipulate that you must have life insurance and name your ex-spouse as beneficiary so that maintenance payments will continue when you die.

Make a good choice
It makes sense to nominate someone who is responsible with money and will spend it taking care of your loved ones. Look for someone who is:

Responsible: They will take control of the pay-out, plan ahead and spend the money according to a plan.

Trustworthy: They will spend the money on school fees and home loan repayments, not designer shoes or expensive holidays.

Money savvy: They can make smart money decisions such as identifying scams, evaluating investment opportunities and saying no to unreasonable demands.

Well supported: They have a financial adviser who gives an independent, objective view of their financial situation, is knowledgeable about investments and helps them plan so that the pay-out is wisely spent.

Help your beneficiary spend the pay-out wisely
In addition to making a good choice when you name your beneficiary, you can help them spend the pay-out wisely by:

  • Talking to them about why you took insurance and what you would like them to spend it on - for example, you might intend the money to be used to pay off a long-term debt like a home loan, or for living expenses, or to pay for your children’s education. You can read more about what to tell your beneficiaries here  
  • Making sure they have support, for example introduce them to your financial adviser who can guide them and help them spend the money well

Is there anyone you shouldn’t name as beneficiary?
Be wary of naming these beneficiaries:

1. Your estate
“When you name an estate as beneficiary the proceeds of your life policy become part of your estate, and your will controls who receives the asset,” says Nathan.

This means the heirs named in your will will inherit. However, before they are paid their inheritance, all your debts have to be settled and any relevant taxes and costs such as executor’s fees paid. So your heirs won’t receive an insurance pay-out immediately when the insurer pays a claim, and the amount they receive may be less than the original pay-out if debt and costs are high.

2. Minor children
Think carefully about naming minor children as beneficiaries, says Nathan. Children under the age of 18 cannot inherit directly, which means the pay-out from a life insurance policy may either be paid into a trust set up in terms of your will, or paid into the Guardian’s Fund.

If you have specified in your will that a trust be set up to manage any money for your minors, you need to name trustees, and ensure they are responsible and will use the trust to take care of your children’s needs. If the money is paid into the Guardian’s Fund your children will have limited access to the funds until they turn 18. You can read more about the Guardians’ Fund here.

3. People who cannot manage money well
You shouldn’t nominate a beneficiary who cannot manage assets. A life insurance pay-out is usually a large sum of money and is paid in one amount. If your intended beneficiary has a history of poor financial decisions - splashing out on luxuries when they can’t pay their car finance repayment, for example - there’s a good chance they will squander or mismanage the pay-out.

The best for your family
It can be a tough call to exclude your spouse or your adult child or your favourite sibling as beneficiary because they make poor financial decisions. Talk to them about your decision and explain why you made it. Let them know that you are doing what is best for your family by choosing a money savvy and responsible beneficiary.

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