Your debt will follow you to the grave and can even leave your loved ones worse off, financially. This is why proper estate planning is critical for any adult.
While your liabilities include loans and other credit agreements, your assets include things such as life policies, property and vehicles. Your loved ones cannot inherit anything until all the debt in your deceased estate has been settled.
To find out how you can avoid a situation where your family has to wait for months or even years before your deceased estate can be wound up, we spoke to John Manyike, Head of Financial Education at Old Mutual. He explains what you need to do now to protect your loved one’s future when you have passed on.
What happens after your death?
Upon passing, all your assets, income and liabilities form what is referred to as your deceased estate which is then vested in the Master of the High Court who then appoints an executor to manage the affairs of the estate.
The primary function of the executor is to locate and collect all assets, liquidate the estate’s liabilities, and distribute the balance of your estate to your heirs.
It is very important to make provision for debt in any estate as this is an important part of estate planning, and failure to do so can leave your surviving spouse and/or heirs financially compromised.
Assets that you had you had intended to leave to your loved ones may need to be sold to pay off the debt in your estate which, besides leaving your heirs in a financially compromised position, could have tax and Capital Gains Tax consequences that your estate is not equipped to deal with.
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What if you die without a will?
If you die intestate, meaning no valid will can be found, then the distribution will take place according to the laws of intestate succession. In South Africa, this means that your estate will be divided amongst your surviving spouse, children, parents or siblings according to a set formula.
Whereas if you die leaving a valid will, your executor will distribute in accordance with your wishes.
Your executor is the legal guardian and legal representative of the assets and liabilities in your deceased estate, and is responsible for ensuring that the estate’s debts are paid correctly and in order of preference, keeping in mind that SARS gets its money first.
What examples of policies are available that can automatically cover some of the debt of a deceased person?
Credit life insurance is an insurance policy that pays your monthly premiums on an existing credit or loan agreement for up to 12 months, in the eventuality of permanent disability, retrenchment or death should you be unable to earn an income. This form of cover should not be overlooked for the peace of mind and protection it offers as outstanding debt will be paid for up to 12 months by this policy, directly to the lender.
That’s why it’s so important to read any credit agreements carefully (from store cards to credit cards and vehicle finance) before signing them. If after reading a credit agreement carefully you’re still unsure about how you are protected, ask.
It’s important to note that while it covers you for the reasons already outlined, credit life insurance lapses if the account is in default.
Are all credit life insurance policies underwritten?
Most credit life insurance policies are not actually underwritten. What this means is that your premiums aren’t calculated according to your individual risk, so if you have a pre-existing health condition, you might not be covered if you die as a result of that condition. The new regulations limit the exclusions which may be included in a credit life policy. When it comes to credit life insurance, it’s important to ensure that you aren't paying too much for your cover.
Thankfully, the regulations stipulate that “...a monthly credit insurance limit of R4.50 for each R1,000 owed on all credit agreements except mortgages. Ordinary mortgage agreements have a R2 limit for each R1,000 owed. In practical terms, a mortgage agreement of R700,000 should carry a maximum monthly credit life insurance premium of R1,400”. These regulations apply to all loans taken out on or after 9 August 2017.
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How does life insurance work?
Life insurance pays out a benefit to loved ones or other beneficiaries when you die. It also often used to settle debt such as a bond, motor vehicle, personal loan, current education expenses or to leave a legacy for charities.
Life insurance is typically used to make sure you financially protect those you love in the medium to long term. For example, Old Mutual's Life Insurance pays out a tax-free single amount starting from R100 000 lumpsum or a monthly payment from R3 000 when you die. Your loved ones can use the pay-out to cover expenses, such as a home loan, estate duty, ongoing living expenses or education costs.
It’s important to choose the form of cover that makes the most sense for you. You can also cede your life cover to a bank to settle a bond and the balance can then be paid to your estate. This means that your family’s home will be protected in the eventuality of your death.
• Estate planning: The Fiduciary Institute of Southern Africa: fisa.net.za
• Financial planners: fia.org.za and www.fpi.co.za
• Financial institutions such as Old Mutual have websites with basic information on wills and estates.
- It is important to speak to a financial adviser before deciding on a product to ensure you choose the cover that best suits your needs.
