In this article, we will describe 4 common scenarios where having life cover is important and how best to structure it.
Death can be an expensive affair and in this regard, here are few very important tax and legal fee considerations:
- Estate Duty
- The first R3,5 million of your net estate is free of Estate duty.
- Estate Duty is 20% on the first R20 million and 25% on anything above.
- Anything you bequeath to your spouse is exempt of Estate Duty (Sec 4q).
- Executor Fees
- The executor of the estate can charge up to 3.99% ex VAT of the value of your estate.
- When one appoints beneficiaries to their policy, those proceeds avoid executor fees.
And so, with the above in mind and the list to follow, we aim to highlight the need for life cover’s grand cash injection and how to minimize any waste and tension.
1. Debt
If you are the bread winner (even if you share household costs with your spouse/part) and should you have a bond on your home, there is a good chance your spouse/family will not be able to afford the bond repayments without you. This means that, in the event of your death, they would need to sell their home in order to settle the bond. In this scenario, a life policy can easily provide peace of mind that you won’t be too sorely missed and, perhaps even, posthumously, appreciated. When taking out the policy to cover the bond, the question often arises; Who should be the beneficiary? The bank? My Spouse? Or my Estate?
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- Estate – Naming your estate as the beneficiary is probably the simplest route to take, for you and your family. This is normally done, if you only have one policy that caters for covering all your other needs (see below) as well as the loan. In this case, one would leave just enough in the estate to settle all obligations include debt, leaving the rest for your spouse and heirs. The heavy administration of settling your estate’s debts can be left to your executor. However, this does come at a cost, as you will be charged executor fees and need to pay estate duties.
- Spouse – beneficiary nominations cannot be conditional, so trusting one’s spouse to settle the debt would need to be worded carefully in one’s Will. However, this could be advantageous as its simpler leaving your entire policy to the person you trust most. A possible issue is that it could be burdensome on them, especially after suffering a loss and potentially trauma. Furthermore, they might not be fully aware of your financial planning and subsequent obligations. There is potentially large saving in taxes however, as this strategy too helps avoid executor fees as well as Estate Duty.
- The Bank – One can cede their life policy to the bank. This is usually done when the bank insists one needs a policy in order to take out the loan. This should only be done when a policy is specifically taken for the loan, otherwise your other beneficiaries may wait a while before receiving their proceeds. This strategy also allows one to avoid executor fees.
- If you have other or additional cover on this policy, but its been ceded to the bank, it can be very complicated to make changes or amendments. If you have other requirements (income protection etc.), its best to take out a separate policy.
2. Taxes
When one passes away, excluding what’s left to your spouse; if your estate is larger than R3,5 million, it is estate dutiable. Furthermore, assets you own will attract capital gains taxes since they change ownership. Lastly, if one has earned income in the year they pass, they are still due to pay SARS on that income. Having a life policy can be very useful to settle those debts. Without it, your estate may be forced to liquidate assets, which you were intending to bequeath to loved-ones in order to pay these taxes. In this circumstance, its easiest to review your estate, and ensure your life policy is large enough to cover these costs. In these circumstance you could either make the estate or your spouse the beneficiary. Once again, if its your spouse, you avoid many costs, however your Will needs to be worded carefully.
3. Legacy
Often one hasn’t had a chance to build up enough wealth to leave something for their family. They’ve focussed most of their earnings towards paying off debt, enjoying life and looking after their family (schooling, holidays, health etc.). However, by having a life policy you can leave a significant amount to your loved ones, without needing to have saved up a fortune. In these cases, you would take a life policy and assign a percentage to each person (or charity?) that you would want to benefit.
4. Business Partners
- This is probably the most over-looked/ neglected reason for having life cover. If you have a business partner (who has a family), and they pass away, there are two major concerns:
- Their family will mostly likely need the value of your business partners shareholding. The business is probably a major asset and supported their lifestyle.
- You on the other hand, probably don’t have the available cash to buy them out. Furthermore, in most circumstances, wouldn’t want them to slot in as your new business partner.
- The solution is a buy and sell agreement. This agreement stipulates that should either partner pass away, they will instantly buy them out, using a life policy. The policy provides you with instant liquidity to make the purchase and importantly, the dependant family receives the needed funds much quicker. In this case, you would take out a policy on your partners life, based on the value of your partners shareholding and, you would be the beneficiary of this policy.
- The bonus of this structure, is that its exempt of estate duty tax. Its important to have the agreement drawn up and also have the policy set up correctly, otherwise SARS may decide to charge estate duty.
We hope this has helped demystify some of the nuances and confusion of structuring a life policy.
If you want to review your policy or feel that you need to take out a policy, please feel free to get in touch. We’ll happily guide you through the process.
Warm regards,
Kanan Wealth Pty Ltd
