Most people have some form of insurance or death benefits. This could be a policy taken out for a specific reason, or simply because they are employed or a member of a retirement fund. How these death benefits are paid and to whom, all depends on the benefit and your nomination form.
Many people may not realise they have these benefits or that, without specific instructions, those death benefits will not be paid to their loved ones.
Check your life policies, especially those with your employer
A life policy or a funeral benefit is paid out to whomever you have nominated on your policy documents. Problems arise when policyholders forget to update their policies after a marriage or divorce.
Roger Scharges, financial planner at financial services firm GTC, says this is especially true when it comes to employee group benefits, where the life cover or funeral policy is part of the employee benefits provided by the employer.
Employees often forget they have this cover in place and don’t update beneficiaries when their circumstances change. Scharges says typically an employee who is single with no children will nominate a parent as the beneficiary. Then they get married and forget to update the policy to include their spouse. Or the employee gets divorced and remarried, yet the life policy is paid out to the ex-spouse.
Why your nomination form is crucial
Sabir Bacus, senior benefit consultant at GTC explains that when it comes to death benefits, legally the employer cannot over-ride the nomination form. Bacus says this is particularly relevant to policies where the employee has not nominated a beneficiary.
“Previously an employer could use their discretion and pay out directly to family members, however, due to changes in the law, in the case where there is no nominated beneficiary, the life cover or funeral cover must be paid out to the estate,” explains Bacus.
This has serious financial consequences for the family:
- The life cover or funeral cover will not be paid out directly to the family to meet expenses and other needs. It will form part of the estate which takes time to wind up. If there is no will, it could take years for the estate to be finalised.
- The life policy would be first used to settle any debt in the estate and there may be no benefit left for the family.
“The importance of a completed beneficiary nomination form cannot be over-emphasised,” says Scharges who adds that employees should also check the nomination form on their funeral benefits.
If the nomination form is a split between all family members with 50% to spouse and 10% to each of five children, the funeral benefit will be paid out in those percentages to the nominees. “This works for life cover but is not ideal for a funeral benefit,” says Scharges who recommends that a separate funeral beneficiary nomination form is completed.
Be honest in your retirement fund nomination form
Unlike life cover or funeral cover, the trustees of a retirement fund must allocate the deceased’s retirement death benefits according to Section 37C of the Pensions Fund Act. This stipulates that anyone that was financially dependent on you must be provided for.
Bacus says this can include your spouse, your children and even parents or any other person who was factually dependent on you.
However, a beneficiary nomination form is still an important document. “Although the trustees will need to do an investigation into who qualifies as a dependant, trustees rely on the nomination form to know who your dependant’s are. We are also seeing the courts and other judicial bodies placing more emphasis on nomination forms,” says Bacus.
A nomination form is also an opportunity for you to explain your set of personal circumstances if needs be. In the case of multiple dependants, you may for example provide for some dependants through other means (for example a personal life policy) but you must still include them as dependants on your pension fund, even if you do not allocate a portion of the benefit to them. The trustees would need to be aware of all dependants, including other means of support provided to dependants.
A nomination form is particularly important in the case of a permanent life partner. Under the Pension Funds Act, a life partner is recognised as a spouse by definition. However, one does need to prove a permanent life partnership, unlike a marriage or civil union that has a registered legal agreement in place.
“The most common way is when you share a household and have shared expenses, however, if you don’t live together the partner would need to provide proof, for example obtain affidavits from family members,” says Bacus.
In the case of customary law, lobola papers can be provided, however these are often misplaced by the family. Bacus recommends that couples register their marriage in terms of the Recognition of Customary Marriages Act. By doing this, a permanent record of the marriage will be held by the Department of Home Affairs.
Scharges advises that in the case of a life partnership, the member should notify the fund and their financial adviser, in writing, of the extent of the relationship. Also include other relationships you may have.
“The reality is that there are often children born out of wedlock or one may have multiple partners. We see it every day and it creates rifts in families and complicates the process,” says Scharges who advises that you should include these relationships on your nomination form.
Your family will not know while you are alive, as it remains confidential. If you pass away, those relationships will come out of the woodwork one way or another. At least have a plan in place.
Five things you didn’t know about your retirement benefits
Parents can be dependants: Parents can claim maintenance from their adult children under the Maintenance Act. The parent claiming maintenance must prove that they are destitute, that a duty rests on the child to support them, and that the child is financially able to support them.
Only a dependant at time of payment: The trustees will only consider those who are dependants at time of payment of the benefit, not at the time of death. For example, if six months into the investigation a parent who was a dependant dies, then the money is distributed amongst the remaining dependants, and not paid to that deceased parent’s estate. Trustees have a duty to look after people who are living.
Financial dependency: Trustees will determine the amount each beneficiary receives based on their financial dependency. A factual dependant can include adult children or parents, but the trustees are not obliged to pay a dependant if they are financially well off. This can also apply to an unborn child.
You can nominate someone who is not a dependant: Apart from dependants, you may nominate any other person to receive benefits. For example, a young person who has just started working and has no financial dependants can nominate any other natural person. This is typically their parents or siblings, but it could be anyone, as long as it is a natural person (not a juristic person such as a church, charitable organization, a company etc ). But this nomination must be done in writing.
No estate duty: There are no estate duties or executor fees payable on your retirement fund as it does not form part of your estate. The benefits are taxed according to the retirement tax tables which allow the first R500 000 to be withdrawn tax-free. The remaining amount is taxed according to the retirement tax rates.
This article first appeared in City Press.