No minor problem – What happens when you appoint a minor as the beneficiary on your life policy?

Life insurances not only guarantee that your family is financially taken care of if you die but also enables them to maintain their lifestyle after you are no longer here. This is done by paying a death benefit to your appointed beneficiary. Appointing the right beneficiary is crucial as this decision means that the person whom you have chosen will receive the money from your policy. While you can nominate any person to be the beneficiary of your life policy, for the time being, this article focuses specifically on appointing a minor and how this choice can impact the eventual payment.

In South Africa, a child under the age of 18 is considered a minor. It is common knowledge that it’s possible to appoint a minor as a beneficiary on a life insurance policy, but not necessarily advisable. Below are some facts that will help you understand the implication of appointing a minor as a beneficiary.

Let’s take a situation where a husband and a wife are getting a divorce. The wife was previously the beneficiary on the husband’s policy, but after the divorce, the husband changes the beneficiary to their child to ensure that the child’s future is financially secure. The father then dies whilst the child is still a minor. Since the law prevents Insurance Companies from paying the proceeds of a policy directly to a child who is under 18, the proceeds of the policy are usually paid to the minor’s guardian. An issue that could arise is that the pay-out may in fact never reach the child for whom the money was intended. In the above example of the divorced parents, the ex-spouse will actually receive the proceeds of the policy (assuming that she is the child’s guardian). This money could very well end up being used for other things unrelated to the child, which, ironically, was exactly what the husband was hoping to avoid by changing the beneficiary from his ex-spouse to his child in the first place.

What also needs to be considered is the case of the child having more than one guardian. In a culture as diverse as ours it is not uncommon for a child to have multiple guardians at the policyholder’s time of death. Without getting too technical with legal jargon, the law essentially considers any individual who qualifies as a guardian as being competent to act independently and without consent of the other guardians.

Now what happens if the child doesn’t have a legal guardian or if one has not yet been appointed? In this case, the death benefit will be paid to the government’s Guardian Fund. Briefly, the Guardian’s Fund falls under the administration of the Master of the High Court. It is responsible for receiving and managing money of individuals who are not legally capable or who don’t have the capacity to manage their own affairs. When the policyholder dies, the Master receives the proceeds of the policy and opens an account in the Guardian’s Fund in the name of the child. The money in this account is invested with the Public Investment Corporation and interests accrues monthly. The issue with the Guardian’s Fund is that it is complicated and cumbersome to access this money and maintenance can be claimed by the guardian or any person looking after the child. In addition, the interest rates on the invested money are usually much lower than what you could achieve through other forms of investments. Finally, the child can only access the invested money and the accumulated interest when they turn 18.

We, at PBA, find that people often don’t consider all the consequences of nominating a minor as a beneficiary on their life policy. The take-home message of this article is that if the proceeds of a life policy are paid to a minor’s guardian, this guardian can use this money in any way THEY deem fit, which may not always be in the child’s best interest. It is for this reason that appointing a minor as the beneficiary is not always the most advisable option. Contact PBA Financial Services to discuss more appropriate alternative options.

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