Timing your cover payout

2014-04-13 15:00

You need funeral cover because a life policy doesn’t pay out immediately

When my father committed suicide 18?years ago, he was thoughtful enough to leave an envelope with R5?000 cash on the dining room table. The sad reality is that he understood enough to know that we would need cash to tide us over the immediate expenses, including his funeral.

You might think that you don’t need funeral cover because you have a life assurance policy. But the life assurance policy does not always pay out immediately and in many cultures, you are expected to have the funeral within one or two days of death.

Elad Smadja, the head of Bancassurance product development at Liberty, says the key distinction between life insurance and funeral cover is the time it takes the provider to pay out claims after a death has occurred.

“In the case of a funeral plan, claims are generally settled within 48 hours of receiving all the necessary claim documentation. Life cover, on the other hand, can take several days, weeks or even months to pay out claims,” he explains.

Immediate cover

Funeral cover is insurance that provides funds for the short term. Most policies pay out a lump sum at the time of the claim and provide for things such as groceries for family members during the funeral preparations, airtime to communicate with family members, the tent, tables and chairs for the event, catering, the casket and tombstone, flowers, and transportation for immediate family members from the ceremony to the graveyard.

“Funeral cover is important, so your family is able to give you the dignified funeral you deserve. However, it is also important to think about what will happen to your loved ones after you are gone,” says Smadja.

Covering ongoing expenses

Life cover provides funds, which consider the long-term consequences of death?–?life after death. Smadja explains that the value of life cover is usually three times your annual salary and, in most cases, is paid out as a once-off lump sum.

“The purpose of life cover is to ensure that there is enough money to firstly settle all outstanding debts upon your death and secondly, to continue providing for your dependants who are left behind,” he says.

Smadja cautions that it is important for the main beneficiary of the life cover policy not to spend the money all at once. He says your beneficiaries should rather reinvest the money into a unit trust or education policy (if there are children involved) so the money can grow over time and provide for your dependants for as long as possible.

To address the fact that consumers often need money for immediate expenses when a loved one dies, Liberty has introduced the immediate expenses benefit on selected life cover policies. The benefit will pay out the lesser of R50?000 or 10% of your life cover within 48 hours of receipt of the required claim documents.

Smadja says this money may be used to take care of any expenses that come up immediately after death before the full life assurance claim is finalised.

Types of cover and when they pay out

Life cover

Unlike retirement funds or other funds that form part of your estate, life cover does not require a trustee or executor to sign off on payment.

While it may take longer than funeral cover to pay out, it can fund you while your estate is being wound up. Life cover could also be used to give your estate liquidity to facilitate payments of death taxes, mortgages or debts.

This will ensure your dependants do not have to sell off some of the assets to pay. It will also ensure whatever financial plans you had made for your dependants are not disrupted.

Unlike retirement cover, your life assurer has to pay the sum insured to the beneficiary you nominate on your policy. It is not legal for an insurer to make payment to someone else if you have nominated a beneficiary.

If you have a will that leaves “everything to your wife”, this will exclude any life assurance policy, where, for example, your parents are listed as beneficiaries.

So the beneficiary nomination on your life assurance policy takes precedence over your will. If there is no beneficiary nomination, proceeds are paid directly into your estate.

Funeral cover

This is usually paid to the nominated beneficiary within 48 hours. Smadja says while the intention of this cover may be to pay for a funeral, the insurer cannot force the beneficiary to use the money for this purpose, so select your beneficiary with care. It is possible to have more than one funeral policy for a single person.

For example, siblings might take out a funeral policy on their mother’s life. This is allowed as long as the maximum sum insured is not exceeded, which is usually about R50?000. Both policies will pay out the cover amounts.

Temporary disability cover

This is paid out as an income and covers your expenses until you recover or are formally diagnosed as permanently disabled. Once permanent disability is established, your disability cover will pay out.

.?Retrenchment protector: A capped insurance that will pay out a monthly income for up to six months if you are retrenched and cannot find another job within a month. The income will help cover your financial responsibilities while you try find another job.

Premium waiver

This cover pays for the premiums on your policy in the event of retrenchment, disability or death. In other words, your premiums are waived. In the case of retrenchment, the waiver will be for up to 12 months.

For disability, the waiver will be in place for as long as the disability claim is being paid. In the event of your death, the premium on your family’s benefits on the policy will be paid.

Retirement funds

Unlike life cover, retirement fund trustees will only use your beneficiary nomination as a guide. By law, the trustees have to trace all your dependants and distribute your retirement fund proceeds among them.

For example, if you name your wife as a beneficiary on your retirement fund but your mother was also financially dependent on you, the trustees will have to split the funds between your wife and your mother.

When a loved one dies

Prem Govender, chairperson of the Financial Planning Institute. shared this checklist:

1 Find the deceased’s will. This may contain funeral arrangement preferences and a “letter of wishes” with information regarding the funeral.

2 The undertaker will usually arrange the death certificate. If not, you can get a copy of it at the home affairs department.

3 Take your ID, a copy of the death certificate, a copy of the deceased’s ID and the policy details to your insurer to claim on the funeral policy.

4 To claim on an insurance policy, you need the same documents as for a funeral policy, your marriage certificate if you are the spouse and a medical report if death was by natural causes.

If the death was unnatural, you need the investigating officer’s report, the postmortem report and sometimes, the inquest report.

5 The deceased’s bank account will be frozen. Report the death to the Master of the High Court who will issue a letter of authority to the bank instructing them to close the account and pay out funds to the executor of the estate. You can do this via your local magistrates’ office at no cost.

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