Should I keep my policy in force during challenging times? The protection of your financial plan becomes paramount in difficult times, with the saying “those who fail to plan, plan to fail” being particularly relevant. Policy retention should be carefully considered.
When under financial strain, many clients forget the reason for having certain policies in place. Section 63 of the Long-Term Insurance Act gives protection to policy benefits, provided that certain requirements are met.
It goes without saying that, when times are tough, we all consider cutting back and reworking our budgets. Some may even consider cancelling a life insurance policy and then have a new one put in place when times are easier and money is no longer a problem.
Besides having health changes that could affect whether you would even get life insurance in the future, it is important to consider your own risk of insolvency and the necessity to have a policy that is already in place and complies with the requirements of Section 63 of the Long-Term Insurance Act.
When would the benefits of a policy be protected from a creditor?
1. The proceeds of a policy with a beneficiary nomination are protected from the creditors of an insolvent estate because these proceeds do not form part of the estate. The proceeds will be paid directly to the beneficiary.
2. Section 63 of the Long-Term Insurance Act 52 of 1998 provides protection to long-term insurance policies against the claims of a creditor when certain requirements are met.
The proceeds of a policy with a life insured are protected. These include a life policy, an endowment policy, a disability policy, an assistance policy (life cover allowed up to a maximum of R30 000) and a health policy. Where an asset is purchased by solely using the proceeds of a policy, such property will also be protected for a period of five years.
Although Section 63 is drafted in such a way that it could cover various scenarios, the most common example where it could apply is where a policyholder is the life assured and has not nominated a beneficiary to receive the proceeds, thus making the policy proceeds payable to himself or his estate. If such a policy has been in force for at least three years, the full policy benefit will be protected from creditors:
- during the policyholder’s lifetime for a period of five years from the date the benefit was provided; or
- upon the policyholder’s death, provided he or she is survived by a spouse, child, step-child or parent (estate heirs).
Note that Section 63 does not only apply to a situation where the life assured receives the benefits, but also applies in situations where the life assured is the spouse of the person receiving the benefits.
Are policy benefits that are paid to the deceased estate protected? When policy proceeds are paid out to the deceased’s estate, the funds will be protected under Section 63 in favour of the surviving spouse, child, step-child or parent (estate’s heirs). In the absence of such heirs, the proceeds will only then be fully available to the creditors of the insolvent estate.