What is a beneficiary when it comes to life insurance?

In South Africa, we are quite keen on getting insurance. The problem that a lot of people experience though is that they do not quite understand the various terms used in the policy documents and what the implications of these terms are. One area that is often not properly understood is the nomination of a beneficiary when it comes to life insurance policies.

What is a Beneficiary?

A beneficiary is someone that will benefit from the policy when it eventually pays out. Basically it is the person that you nominate to receive the money from the policy when you die. A lot of people are confused about what nominating a beneficiary entails. The beneficiary can be anyone that you deem should get the money. This can be your spouse, your kids or even your business partner, etc. You are going to be asked for the person’s full names and possibly their ID number in order to make identification easier in the event of a payout becoming necessary.

The Tax Benefit

The big advantage of having a nominated beneficiary on a policy is that the payout does not form part of the deceased estate at all and, as a result of this, does not attract any estate taxes. It is paid directly over to the beneficiary without ever forming part of the estate and so the amount is also safe from those with claims against the estate, such as creditors.

The Beneficiary’s Rights

Because the policy payout does not form part of the estate, it is not subject to the normal winding up process. The policy also usually pays out a lot more quickly than an estate normally would and is not subject to the whims of your executors. Basically you can help to ease the burden of your death by choosing one of your dependents as the beneficiary. You should realize, however, that should you have ceded your policy as collateral for a loan, the company that the cession is in favour of will have the first claim to the policy.

Who Should you Choose as a Beneficiary?

The ideal person for you to nominate as your beneficiary is obviously someone that is going to need the money after your death. Perhaps the person who is going to look after your family should you die. You could nominate your kids as beneficiaries but should remember that, if they are minors, the money will not be able to go to them directly. Choosing the right beneficiary is important. Should you not be married, you may consider one of your family members. Consider what the beneficiary will do with the payout. In need, you can nominate more than one person as a beneficiary.

Once you understand exactly what a beneficiary is and what the principles of nominating a beneficiary are, it is a fairly simple matter to choose the right beneficiaries. Consider carefully who you do nominate in the end – especially if you need this person to use the money to take care of your family.

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