Picture: 123RF/ZIMMYTWS
Picture: 123RF/ZIMMYTWS

September is national wills month, a good time to write a will if you don't already have one, or to review yours if it is out of date. If you have insurance policies, annuities, group life cover and/or a retirement fund, there are things you should know when it comes to leaving instructions about who you want to receive the benefits after you pass away.

Must a life policy be in your will?

One of the benefits of a life policy is that it is possible to nominate a beneficiary. This means that on the death of the person assured, the policy is paid directly to the named beneficiary and does not go via the estate.

These policy proceeds will normally still be deemed an asset in your estate and subject to estate duty (unless a limited exemption for buy and sell or key man policies apply). However, because the proceeds pay directly to the beneficiary, they will not be subject to executor's fees. They will also pay out speedily, and not be part of the lengthy process of winding up the estate.

Because you can nominate a beneficiary directly in the policy, it is not necessary to mention your life policies in your will. In fact, it is best that you don't as it can lead to problems since people often nominate people to inherit in their will who are not the same as the person nominated as the beneficiary of a policy. So, don't mention your policies in your will, but make sure you have nominated a beneficiary to receive the proceeds. This applies both to a life policy and an endowment policy with a life assured.

Issues around beneficiaries

It is crucial, at least once a year, to do a "beneficiary nomination audit". This entails checking the following:

  • Is there a beneficiary in the policy? There might not be a beneficiary for many reasons, for example, the beneficiary has died. If there is no beneficiary,the proceeds will pay into your estate, and will then become subject to executor's fees. They will also be subject to the winding-up process of the estate, and there will be a delay before the heirs receive their payout. Make sure there is always a beneficiary in the policy - unless you want the policy to pay into the estate to create liquidity to pay estate debts and taxes.
  • Is the correct person named as the beneficiary? There have been many cases in which the wrong person was named as the beneficiary. For example, one client had an ex-girlfriend from more than 40 years ago named as a beneficiary as he had forgotten to change his nomination. There have also been many cases where clients still have former business partners as beneficiaries. Most important, check that your ex-spouse is not still a beneficiary, unless that was a stipulation in the divorce agreement.
  • Is the appropriate person the beneficiary? Policies run for years, but circumstances change. For example, if you started out with a small policy years ago, you might have made your spouse the sole beneficiary, but now the policy might have grown substantially in value. Do you still want your spouse to be the sole beneficiary, or should he or she perhaps share the proceeds with your children? You might want to add multiple beneficiaries. There may be estate duty consequences if your spouse is not the sole beneficiary.

Just as you should update your will every year, you should conduct a policy-beneficiary nomination audit every year, together with your financial adviser.

Retirement funds and wills

Pension funds, provident funds, preservation funds, retirement annuities and approved group life policies all fall under the Pension Funds Act, particularly section 37c.

Section 37c of the act removes your freedom of testation regarding the payout on death, and obliges the trustees of the fund to pay the death benefit to your dependants - some or all of them - in proportions that are deemed equitable.

The trustees of the fund therefore have the discretion to overrule any beneficiary nominations and to pay dependants as they deem equitable, and in such proportions as they deem equitable.

Retirement fund benefits should therefore not be mentioned in your will, but you should still nominate a beneficiary for them, because even though the trustees are not bound by your nomination, it is still a useful guide for them.

If you do not have any dependants as defined by law, the trustees will look at your nomination. Benefits of what is known as an unapproved group life policy (one taken out by an employer rather than the fund) and a living annuity are not subject to section 37c of the Pension Funds Act.

Therefore it is very important to nominate a beneficiary for these policies, as this beneficiary will receive the proceeds just like a beneficiary of a normal life policy. Again, because these funds have beneficiaries, they should not be mentioned in your will.

Testamentary trusts and policies

Remember that the insurance company with whom you have your life policy does not check your will when you die. The company pays according to your beneficiary nominations only. That means if you nominate a minor beneficiary in your policy, the company will often pay the minor, even if you have a trust set up in your will. It is entitled to do this, as a policy does not fall under the Administration of Estates Act.

If you want your testamentary trust to be paid, you must nominate it directly as a beneficiary on the policy.

Final word

One of the key issues with a will is to remember that it must be updated and checked regularly. This is just as important for the beneficiary of your life and endowment policies, unapproved group life and living annuities - check at least once a year the beneficiary nomination you have made to ensure that this is still the person to whom you want the benefits to be paid.

• Joffe is the head of legal services at Discovery Life