Offshore life cover policies can offer a range of advantages to South Africans
South Africans may find foreign life policies useful when planning their estate. Last month's article focused on offshore endowment policies for investments, but foreign life policies are also useful for those who want some of their life cover in hard currency or paid out in other countries where they have family members or liabilities.
You can now use your investment allowances [either the R1m single discretionary allowance or the R10m allowance which requires a tax clearance certificate (TCC allowance), or both] to buy offshore life cover, as some local insurers offer such a product.
You may be wondering what some of the advantages are of buying an offshore life policy with a South African insurer.
Buying an offshore policy through the branch of a local insurer is cheaper than buying an offshore policy through a foreign insurer, as foreign insurers underwrite South Africans negatively due to the numerous risks they perceive.
A foreign policy issued by a South African insurer will not be subject to capital gains tax on payout, unlike a policy issued by a foreign insurer that is not registered in SA. The estate duty consequences of such a policy are complex and depend on the facts of each case. Get your particular case checked by a tax expert.
Payment to beneficiaries offshore
One of the major benefits of an offshore policy is for those who have beneficiaries living and working abroad.
A local South African policy, paying out in rands, will not be allowed to pay out to offshore beneficiaries unless they have emigrated officially through the Reserve Bank.
Given that in most cases the beneficiaries would not have done this, the local policy payout will be stuck in SA. A foreign policy can pay out anywhere in the world and will not be subject to forex restrictions.
Another benefit of a foreign policy is to cover offshore debt. Assume X buys a property in Mauritius and has to take a bond for a part of the purchase price. The bank will normally want a policy as security. A local South African policy cannot be ceded to a foreign bank due to forex issues. An offshore policy would solve this problem.
The major potential debt, which is often forgotten about, is offshore estate duty. Assume X owns a flat in London. When he dies, he will need to pay death duties there, assuming the value is above the rebates. Where does the foreign cash come from? A foreign policy is ideal to create the foreign liquidity to pay any offshore estate duty, particularly for those with assets in the UK or US.
A foreign policy is ideal to cover offshore business interests. Assume two South Africans run a business in Africa. The business is operated through a foreign company in a tax centre whose shares are in turn owned 50-50 by the partners' two offshore trusts.
If they want to structure a buy-and-sell agreement to buy out shares in the company on the death of either of them, they would not want to use a South African local policy paying out in rands. A foreign policy would, again, solve the problem.
Given that everyone in SA is so affected by the value of the rand, those who have beneficiaries offshore, or foreign assets and potential liabilities, or just want to make sure a part of their life cover is in a hard currency from a diversification perspective, should seriously consider a foreign life policy with a South African insurer.
Note that foreign life policies are not limited to life cover - there are a full range of risk protection benefits available offshore, including disability cover, severe illness protection and even protection for your children's education at any education facility globally.
Discuss with your financial adviser.
• Joffe is head of legal services at Discovery Life