Johan Strydom | Head | Trust Product | FNB Fiduciary Advice | mail me |
When it comes to life insurance, naming your minor child as a beneficiary may seem like the most natural decision. But this well-intentioned move can lead to unintended consequences and even financial risk.
Most parents assume that naming their child as a beneficiary guarantees protection of their life assurance benefits. But legally, minors cannot receive policy payouts directly. That’s where things get complicated.
The legal catch
In South Africa, naming a minor as a beneficiary creates a legal challenge. The law prohibits life insurers from paying proceeds directly to minors because they have limited legal capacity. Instead, insurers must hand the funds to the child’s legal guardian.
Unfortunately, there is often no oversight or guarantee that the money will be used in the child’s best interest. This problem becomes worse during divorce or family disputes. For instance, an ex-spouse who is the legal guardian could receive the full payout. This might happen even when the policyholder wanted the funds to benefit the child exclusively.
The estate route isn’t ideal either
Some policyholders try to solve this issue by nominating their estate or a testamentary trust as the beneficiary. However, this route also comes with drawbacks.
The estate must first go through administration, which can take several months before any funds reach the trust. Only then do they become available for the child. Funds paid into the estate might also be used to settle debts or cover estate costs. This could leave less money for the child.
Delays in estate administration can leave minor beneficiaries without access to funds when they need them most. And that’s not what any parent wants.
A smarter solution – the minor beneficiary trust
To close this gap, a minor beneficiary trust designed specifically to receive life assurance policy proceeds for minors is the solution. This professionally managed trust provides a more secure and structured alternative to naming a minor as a beneficiary directly.
The trust, already registered with the Master of the High Court, can be nominated directly on the policy.
The minor beneficiary trust offers:
- Immediate payment of funds upon claim approval.
- Immediate access to funds and payments for the child’s benefit.
- Professional management by experienced trustees.
- Full transparency and oversight.
- Protection from estate liabilities.
- Capital growth and investment until the child reaches a specified age.
This trust provides an easy-to-understand alternative and gives parents peace of mind. They know the money will be managed responsibly and used for the child’s benefit, not diverted or delayed.
Minor beneficiary trust protects families
In a country where financial planning is increasingly complex, especially for families, the minor beneficiary trust offers a practical and protective solution. It ensures that life insurance achieves its purpose: securing a child’s future.
Ultimately, naming a minor as a beneficiary without proper structures can expose families to delays, disputes and financial risks. Estate planning is not just about ticking boxes. It is about making sure your intentions are honoured and your children are protected when you are no longer here.
