The chief purpose of life insurance is to know that your loved ones will be taken care of should you pass away. Life insurance is less about life than the aftermath of death. As a tool for peace of mind, it’s a top priority for many people. Life insurance as inheritance is a key reason to add it as an option when approaching your retirement and mapping out estate plans.
The inheritance distinction between the two types of life insurance
There are two types of life insurances that can act as inheritance for your family or specified beneficiaries: term life and permanent life.
Term Life Insurance: This is a policy plan that is set for number of years, such as 10 or 20 years. If you die during this set term, the policy will pay out to your specified beneficiaries.
Permanent Life Insurance: this lasts until the day you die, ie: ten years or forty years – it doesn’t matter, and the proceeds go to specified beneficiaries.
Points to note with regard to these choices: If you want a policy to pay out regardless of when you die, consider permanent coverage such as whole life insurance. If you need temporary coverage while you build up wealth, consider term life insurance. Term life insurance does not pay out if you outlive it – it is merely there as a safety net for your family, but is not considered an inheritance, but will pay out if you die during the term.
Key points to keep in mind
- A life insurance policy is one of the most effective ways to pass money on to your heirs.
- The death benefit goes directly to the policy’s beneficiaries and is typically tax-free. This means the funds are not used to pay off outstanding debts in the estate; the beneficiaries receive the money regardless of how the estate may be handled.
- It is important to ensure that the beneficiaries listed on the policy are accurate and current.
- Many see the primary purpose of life insurance to relieve initial financial burdens presented by death, and not necessarily simply to pass on wealth to beneficiaries.
- Life insurance can be a useful lump sum, or used to replace your income for dependents.
- When you buy a life insurance policy, you choose the amount of coverage you want. The death benefit, is what your beneficiaries receive if you die.
- Your life insurance beneficiaries can often choose to receive the pay-out as a lump sum or in instalments.
- The death benefit of life insurance is tax free, which means beneficiaries do not have to pay income tax on the proceeds. A life insurance policy is considered separate from your estate and therefore not subject to tax.
- Beneficiaries may have to pay tax on any interest earned on the principal amount. This may occur when the beneficiary receives instalments.
- Your beneficiaries can use the pay-out for any purpose with no strings attached.
- If your beneficiaries are minors at the time of your death, you should consider setting up a life insurance trust and naming the trust as the beneficiary. Then the pay-out will go to the trust, from where it is issued to your children according to your directives when you die.
Check your policies, check your life
VeriFi is an online tool that provides you with an immediate and up-to-date overview of all your life insurance and investment policies by sourcing information from all the major life insurance companies – and presenting the information in a comprehensive report.
With VeriFi you are able, for no charge, to access information on all your life and investment policies at a glance. You are able to check the types of policies you have, the names of the insurance companies providing the cover, the nature and extent of the insurance cover provided – and other vitally important information such as the details on your policies being correct.
To find out more, please visit: www.verifi.co.za