Quite appropriately, the word ‘beneficiary’ comes from the Latin term ‘bene facere’ which means ‘do good to’. This means that when you nominate beneficiaries on your life insurance policy, you wish to ‘do good to’ them when you die. Even though this is not a very complicated element in the greater scheme of things, there are some idiosyncrasies where beneficiaries are concerned that you may want to take note of. These are the legal standing of beneficiaries and what happens if your beneficiaries are minors.
The legal standing of beneficiaries
Under the South African law of contract, there is a thing called stipulatio alteri. This legal term means that the one party (the insurance company) in a contract can promise the other party (you) in the contract that they will grant some sort of a benefit (life cover value), at a predefined point in time (upon your death), to a nominated third party (your beneficiary) – even though this third party is not involved in the actual contracting at all.
When you complete your insurance application form, you broker will ask you whether you want to nominate beneficiaries. If you don’t want to, the proceeds of your policy will be paid to your estate upon your death. If you do, you will be asked to complete the beneficiary section on the form.
Before doing this, you need to be aware that there are two types of beneficiary clauses. We take a brief look at each:
Revocable – Under a revocable beneficiary clause, your beneficiary has no rights to your policy until you are dead. This means that you can change or revoke beneficiary nominations at any point in time.
Irrevocable – Under an irrevocable beneficiary clause, your beneficiary acquires full rights the moment he or she accepts the nomination in writing. This means that while you are alive, you will not be allowed to change or revoke nominations without the express consent of your beneficiary.
You may already have gathered that irrevocable beneficiary clauses could be somewhat uncomfortable. So, unless your particular situation demands that your beneficiary has the say-so about your life cover, it is perhaps better to elect a revocable beneficiary clause instead.
The table on the application form has room for more than one beneficiary. When you nominate multiple beneficiaries, you can decide how the proceeds of your policy should be divided: either as a percentage or as a Rand value.
To give you an idea:
Mrs. A. Person 50%
Miss. A. Child 25%
Miss. B. Child 25%
Mrs. A. Person R 100,000
Miss. A. Child R 50,000
Miss. B. Child R 50,000
You don’t need to use your beneficiaries’ names, unless you want to. ‘My spouse’ or ‘My child’ will do just fine. In fact, you can even leave the proceeds of your policy to a future spouse or child. They don’t need to exist at the time when you nominate beneficiaries at all.
What happens if your beneficiaries are minors?
If your beneficiaries are younger than 21, they will be treated as minors under South African law where your estate is concerned. This means that – in the absence of a trust – the state will take care of their interests until your beneficiaries are adults.
Your life insurance policy is a different kettle of fish though. Even if your nominated beneficiary is a minor, stipulatio alteri will be enforced as though they were adults. This means that the state will have no say over the proceeds of your policy and the insurer will pay the money directly to your minor beneficiary regardless of whether he or she is 18 months or 18 years old.
This could prove to be a bit of a quandary in some cases. Here is an example to better explain the point.
If you are divorced, and the beneficiary is your child, you may not necessarily want your ex to have free access to your child’s money. Because the money is paid directly to the child, the surviving parent (your ex) – as your child’s natural guardian – will be legally entitled to take possession and administer the money on your child’s behalf. This is exactly what you wanted to avoid in the first place.
That is why setting up either an inter vivos – or a testamentary trust, is usually a good idea. You can make the trust the beneficiary of your policy and your child the beneficiary of the trust. The trust will administer the money until your child is old enough to legally do this on his or her own.
Structuring your estate to protect the interests of your minor beneficiary is not a DIY project. Professional advice is essential should you decide to follow this route.
Remember to revisit your beneficiary situation each time you review your insurance policies. This may seem obvious, but there have been many instances where the ‘wrong’ party ended up with the proceeds of a life policy purely because the policy owner forgot to make the necessary updates. And that is something, most of us would rather want to avoid.