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Taking out life insurance ensures that when you pass, the people you love are not left without the pay-out they need to replace lost income. However, it is essential that you choose the correct life insurance beneficiary.
Choosing who will receive your pay-out is just as important as the cover amount itself. In this blog, we break down how insurance beneficiaries work, who you can nominate and why keeping your policy details updated is the key to true peace of mind.
What is a life insurance beneficiary?
A life insurance beneficiary is the specific person/people you name in your policy to receive the tax-free lump sum pay-out when you pass.
Think of your beneficiary as the "designated receiver." While you own the policy and pay the premiums, the beneficiary is the one who ultimately benefits from the financial protection you have created. You have the freedom to choose almost anyone to be a beneficiary, including:
- Your spouse or partner
- Your children
- Your parents or siblings
- A legal trust (often used for minor children)
- A registered charity
Who can be an insurance beneficiary?
In South Africa, you have significant flexibility when nominating insurance beneficiaries. You can choose to leave your tax-free pay-out to a single person or split it among several people.
Individuals
Most people nominate a spouse, life partner or children. You can also nominate extended family members like parents or siblings if they rely on you for financial support.
Multiple beneficiaries
You don't have to choose just one person. You can nominate multiple life policy beneficiaries and specify exactly what percentage of the pay-out each person should receive (e.g., 50% to a spouse and 25% each to two children).
Trusts
If you have minor children, it is wise to nominate a trust as policies cannot pay-out to minors. This ensures the money is managed by a trustee for the children’s benefit until they reach adulthood.
What happens if you don’t nominate a beneficiary?
If you fail to nominate a life insurance policy beneficiary, the pay-out is paid directly into your deceased estate. This can lead to several challenges:
- Delays: Winding up an estate can take months or even years. Your family might need that money within weeks for daily living expenses.
- Executor fees: Money in an estate is subject to executor fees (up to 3.5% plus VAT), meaning your family pays more in fees.
- Claims from creditors: Money in an estate can be claimed by creditors to pay off your outstanding debts before your family receives anything.
Why communication with your insurer is vital
It is not enough to simply decide who your beneficiary is; that decision must be officially recorded. A recent ruling by the National Financial Ombud (NFO) highlighted the risks of "desk drawer" nominations. In one case, a policyholder signed a form to change his beneficiary but never submitted it to the insurer. Because the insurer had no record of the change, a legal dispute followed that lasted years.
To avoid leaving your loved ones with a legal battle:
- Update contact details: Provide your insurer with the current contact details of your beneficiaries so they can be reached quickly when the time comes.
When should you update your life insurance beneficiary?
Life changes quickly, and your life policy beneficiaries should reflect your current reality. We recommend reviewing your nominations during major life events:
- Marriage or divorce: Ensuring your current partner is protected and removing ex-spouses if necessary.
- Birth of a child: Adding a new dependant to your policy.
- Death of a beneficiary: Replacing a loved one who has passed away.
- Changes in dependants: For example, if a family member becomes more or less dependent on your income.
Tips for choosing the right beneficiary
- Choose someone who will use the money for its intended purpose, like school fees or the bond.
- Insurers cannot pay large sums directly to minors. Consider naming a trust
- Tell your beneficiaries where your policy documents are kept so they know how to claim.
- Use full names and ID numbers to ensure there is no confusion during the claims process.
How life insurance and beneficiaries protect your family
At 1Life Insurance, we believe that life insurance is more than just a policy, it’s a promise of a better future. By correctly managing life insurance and beneficiaries, you provide your family with a financial safety net that covers:
- Daily living expenses and groceries.
- Outstanding debts like car loans or credit cards.
- Long-term goals like university education.
- A beautiful send-off without the stress of unplanned costs.
Secure your family’s future today with Pure Life Cover
Protect the people who matter most by ensuring your policy is up to date and your loved ones are correctly nominated. If you don't have cover yet, you can get a Pure Life Cover quote in minutes. Protect the people who matter most. Get a life insurance quote from 1Life today and save 8% when you get a quote and buy online.
FAQs
What is a life insurance beneficiary?
It is the person or entity named in your policy who receives the tax-free pay-out after you pass away.
Can I have multiple life insurance beneficiaries?
Yes, you can nominate multiple beneficiaries and specify the percentage of the payout each person should receive.
Can I change my life insurance beneficiary?
Yes. You can update your nominations at any time using the 1Life online policyholder portal or WhatsApp service centre.
What happens if my beneficiary dies before me?
If your beneficiary passes away before you do, think about who could replace him or her and then visit the 1Life online policyholder portal to update your beneficiary. This blog is a great guide to choosing the right beneficiary for your policy.
Can a minor be a life insurance beneficiary?
Yes, but they cannot manage the funds directly. Funds are usually managed by a guardian in a trust until the child turns 18.
Do I need to update my beneficiary?
Yes. You should review your beneficiaries at least once a year or after any major life event to ensure your wishes are still reflected.