Q: I have an FNB Life Cover Policy with whole-of-life term of benefit. My policy states that my chosen beneficiary will be receive my chosen lump sum when I die. Is my ‘chosen lump sum’ the R1 million cover that is listed in my policy? So even if I am now 39 and I die in 41 years’ time at 80, and my wife is then 84, she’ll get R1 million? Have I understood right? Or does life insurance, as I’ve heard others say, pay out what debt you have remaining to the value of R1 million (my chosen lump sum)?
Werner Swanepoel - Optimum Financial Services Group
Life cover pays a lump-sum amount in the event of your death, and the amount payable is the chosen lump sum amount reflecting on you policy document or latest policy information.
If you had not chosen any cover increases on your whole-of-life policy, the chosen R1 million will be payable in the event of your death irrespective of when this occurs in future as long as policy is paid to date and in force.
Sum-insured increases may be purchased by means of voluntary premium or cover increases. For example, the policyholder may elect a cover (sum insured) increase of 5%. The sum insured will then increase annually in order to pay for the annual sum insured increase. The increase in premium will usually be higher than the sum insured increase. Life cover increases are normally advisable to keep track with inflation and ensure that cover amounts are sufficient.
In the event of the death of the life assured, a beneficiary will be defined as the person(s) entitled to receive proceeds of the life cover policy. The beneficiary(s) shall have no rights in or to the policy until written notice of the death of the insured has been received. If your wife is the nominated beneficiary on your policy she will receive the R1 million life cover amount in the event of your death. By nominating your wife as beneficiary you can also take advantage of Section 4Q of the Estate Duty Act. This deduction stipulates that your estate does not pay estate duty on the assets that your spouse inherits. So by nominating your wife as beneficiary, she can use the proceeds of the life policy to settle the debt, while also avoiding estate duty and executors’ fees
However, if the policy was outright ceded to a third party, all rights in terms of the policy would be transferred to the cessionary and all proceeds of the policy would be paid directly to the cessionary in the event of a claim and not to you, your beneficiaries or estate.
If the policy was collaterally ceded as security for a loan/debt, the cessionary’s rights are limited to receiving the amount of the policy owner’s liability to the cessionary – i.e. outstanding debt amount (not exceeding the life cover amount). If the outstanding loan/debt amount is less than the life cover amount, the difference will still be paid to your beneficiaries or estate.
Bear in mind that this response is based on limited information. It would be in your best interest to discuss this matter further with a registered financial advisor who will be able to provide you with a more accurate answer after taking all the facts into account.