Life and disability cover fill the gap between what a person has at a certain stage in life and what would be required to ensure that the person or the person’s family is financially well looked after.
Life cover also plays a role in funding buy-and-sell obligations on death, it provides liquidity for debt repayment on death, which includes debt for which the deceased stood surety and lastly, it provides for liquidity in an estate to cover costs or estate duty.
The proceeds of life cover are included for estate duty purposes in the estate of the person whose life was insured unless certain exclusions apply.
Pension, Provident and Annuity Policies
Governments around the world understand the value of having the older generation in their community being able to look after themselves after their working lives. To enable saving for life after work, most countries provide tax benefits on 1) premiums paid into funds earmarked for consumption after retirement, 2) the gains and income earned within those funds and 3) portions of the proceeds received by the beneficiary on retirement.
From an estate planning point of view, there is nothing that needs to be done on defined benefit policies other than taking cognisance of the existence of such a policy. There is no beneficiary nomination, no lump-sum payment and no estate duty or income tax consequence for the estate or for the deceased person.
A defined contribution fund, however, is a fund that is simply the accumulation of contributions made during the policy holder’s life, and the aggregate contributions and the growth thereon is paid to the policy holders through a lump sum on retirement, as well as annuity income until the fund is depleted. As there is potentially an amount left on death, the policy holder needs to appoint a beneficiary to receive the residual benefits. Those benefits can also be taken as an annuity and then this new beneficiary, in turn, needs to appoint another beneficiary until all the funds have been depleted either through lump-sum payments or annuity payments.
Any lump sum taken from these policies after the death of a policy owner or subsequent beneficiary is taxed in the last income tax return of the deceased person. There is no death duty consequence to either the lump sum or the annuity. It is not a deemed asset for estate duty purposes.
The annuity is taxed as income in the hands of the annuitant as and when the annuities are received. The fund itself usually retains the tax-free benefit of the funds that are retained.
The only relevance to a pension or annuity fund from an estate planning point of view is that the advisor needs to ensure that the beneficiary nominations, where required, are indeed in place and that the benefit of the fund is taken into consideration when calculating the relative value each heir will receive in the end.