life cover estate

Keep your life cover safe from your creditors

Posted  November 10, 2015

Did you know that more than 30% of people who die do not leave behind enough available money to pay for immediate funeral and related costs – or to cover their debt? This is according to research by the Fiduciary Institute of South Africa.

The solution to this problem is to take out a life insurance policy which pays out a cash lump sum on death directly to your nominated beneficiary. In fact, most financial advisers regard a life policy as the most important single aspect of financial planning as it enables your family to settle costs that may unexpectedly become due upon your death. Furthermore, you can ensure that your life cover pay-out does not fall into the hands of the people you owe money Read on to find out how you can protect your policy pay-out from your creditors.

Provide for immediate expenses & protect your pay-outFew people are aware of the immediate financial consequences of death and therefore don’t provide for the cash flow difficulties their families often experience during what is already an extremely difficult and emotional time. For your family this can mean a double blow. Not only do they lose you, your emotional support and your income, but they might also have to deal with your creditors and their demands for payment of outstanding debt. The last thing a grieving widow or widower needs are calls from persistent debt collectors and lawyers.

The good news is that your life cover is safe from creditors – provided you nominate a member of your family as your beneficiary (that is, the person into whose bank account the proceeds of the life policy are to be paid, and preferably an individual closely related to you, such as your spouse).

Be aware that if you don’t nominate a beneficiary then the lump sum pay-out will go into what is called ‘your estate’ and will be administered by the government in a process called probate. Probate is a legal process for administering the estate of someone who died. That can take a great deal of time, and also means those businesses you owe money to will be able to claim what they’re owed.

During probate, anyone who is owed money can file claims with the Court requesting payment from the assets in the deceased’s estate. The executor, or person managing the estate, pays as many of the valid claims as possible out of available assets before the family gets what’s left.

However, because certain assets such as a life policy pass directly to beneficiaries outside the estate, they are not subject to creditors’ claims against the estate of the person who died. Retirement accounts are another example of assets which when left to a beneficiary are usually protected in the same manner.

Therefore, to make sure the cash paid out by your life policy is protected from that process, you need to follow the rules! But don’t worry, when you take out a 1Life policy, our consultants will be careful to explain to you exactly what you need to know in order to safeguard your policy pay-out.

Tax-free tooAnother important cash flow benefit of a life policy is that the lump sum pay-out that is received by the beneficiaries upon your death is collected tax-free, whether or not they earn below the minimum of R5,296 a month (the level at which one starts to pay the minimum 18% tax rate). This is because the premiums on a life or disability policy are not tax-deductible to those above the taxable income level, but the pay-out if you claim is tax-free.

1Life’s pure life cover pays out a lump sum in the event of the death of the individual covered, the amount paid out being the amount stated on your policy schedule. Make sure that the funds are available to your family to use to cover immediate expenses and to build the future you always wanted for them.

Popular reads

save when you have little

How can you save money when you can’t even make ends meet? Here are ten tips to help you to grow your savings, even if you don’t earn very much.

things you shouldnt tell kids

Be a good role model to your children and try not to say these six things to them about money.

personal finance review of 2015

There’s no doubt about it – 2015 has left us with a hole in our pockets. We look at all the price increases we’ve had to weather this year to work out how much we need to tighten our belts in 2016.
Featured authors