Category Life Insurance

When nominating a beneficiary is not a good idea

22 January 2004 Dick Broeke

Every intermediary is taught that a beneficiary should be nominated whenever a policy is bought by a client. This will ensure that the proceeds of the policy go to the correct person chosen by the policy owner. But there's more...

OK! So let’s address this issue and see whether the accepted principles are in fact still correct and valid.

When the estate is insolvent
Firstly, the incorrect assumption that the proceeds of an insurance policy will remain ‘out of the estate’ of the policy owner if s/he has nominated a beneficiary. It is true that the proceeds of the policy can be paid directly to the beneficiaryand will therefore not need to be included for the purposes of calculating the executor’s fees. However, the executor must be approached for approval to pay the proceeds to the beneficiary and, should there be a good chance that the estate will beinsolvent, s/he can instruct the insurer to withhold payment until an initial accounting has been completed. Should the estate be insolvent then the proceeds of the policies owned by the deceased, less the first R50 000 only (on all his or her policies), can be claimed by the executor to settle the claims of estate creditors.

For the purpose of the exercise, let’s assume that the estate is solvent and that the executor does thus not need the proceeds of the policy. Is it always advisable to nominate a beneficiary just to avoid the payment of the executor’s fees (3,5%, excluding VAT)?

The estate could end up being ‘illiquid’, with the executor needing to sell off assets to settle creditor claims. While the beneficiary can ‘purchase’ these assets if s/he will eventually inherit them with the proceeds of the policy, and so create the needed liquidity, there is always the danger that the executor and the beneficiary do not communicate and that this opportunity is thus lost. Not nominating a beneficiary on a policy will ensure that the estate will not need to sell off assets.

When nominated beneficiaries are still minors
The other scenario that is often overlooked is that of nominated beneficiaries that are still minors when they inherit. South Africa’s high divorce rate makes this a fairly common occurrence. What the policy owner often does not realize is that the proceeds of an insurance policy paid to a minor will be handed over to the minor’s guardian. The guardian has an
unfettered right to accept the money and may spend it in any way that s/he deems necessary. This is probably exactly the scenario that the policy owner tried to avoid when the minor was nominated in the first place.

DON’T nominate a minor. Should you want the proceeds of the policy to be used for the benefit of a minor leave the money to your estate and set up a testamentary trust in your will. Not only will the money now be available for the minor, but the policy owner, in the will, can nominate the trustees that will protect the child’s interests.

Remember, every case should be considered individually, and an accepted “fact” learnt in early training should not always end up being cast in stone.

Quick Polls


Financial behaviour experts suggest that today’s risk modelling methodologies ignore your client’s emotional ability / behavioural capacity. What are your thoughts on spicing up risk profiling tools to make allowance for your client’s financial behaviours


[a] Bring it on; my client’s make too many irrational financial decisions
[b] Existing risk profiling tools are adequate
[c] Risk profiling tools should be based on the model / rational client
[d] The perfect risk profiling tool is science fiction
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