Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
142. The Lotto Effect: Bidvest Life on How Monthly Payments Make for Smarter Estate Planning
Death, taxes, and financial uncertainty—the three inevitabilities that haunt estate planning. But what if there was a way to provide genuine financial stability for your loved ones after you're gone?
Melody from Bidvest Life joins Bronwyn and Craig to explore an often-overlooked alternative to traditional lump sum life insurance: life income benefits. While over 70% of South Africans still choose lump sum payouts, this episode reveals why that might not always be the wisest choice for your beneficiaries.
We've all heard the stories—lottery winners who lose everything, inheritances squandered during emotional times. The "lotto effect" is real, and even financial professionals aren't immune to making poor decisions with windfall money. Life income benefits counter this by providing regular monthly payments for a specified period, allowing beneficiaries to maintain their lifestyle without the overwhelming responsibility of managing a large sum during a time of grief.
The flexibility of these benefits is remarkable. You can customise payments for different beneficiaries—perhaps 20 years for a spouse, until age 24 for children, or for the entire lifetime of elderly parents. Business partners can use them to keep operations running smoothly during transition periods. The podcast even reveals a significant tax advantage: life income benefits can reduce estate duty by 12% compared to equivalent lump sum policies, and the monthly payments to beneficiaries are completely tax-free.
Whether you're planning for your family's future, supporting aging parents, or protecting a business, this episode offers practical insights into creating financial continuity beyond the grave. Listen now to discover if the "monthly security" approach might be the missing piece in your estate planning puzzle.
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Hello everybody, welcome to Know your Money. I'm Bronwyn Wehner.
Speaker 2:And I'm Craig Finch, and we are from Growth Financial Planning. We hope you enjoy our podcast.
Speaker 1:Hello everybody, we have Melody back BidVest Life to just unpack a little bit more of some of the features of BidVest, and today we are going to talk about life income. So often people, when someone passes away, you get this huge lump sum of money and, as we've spoken in previous episodes, there's so much emotion around all of that and to get that lump sum can really not always be beneficial. So what BitVest has is you receive an income instead of the lump sum amount. So thank you for being here, melody. Maybe you want to unpack that part.
Speaker 3:Absolutely, Absolutely. I am a very big believer in life income. When I was still an advisor in my previous life, my starting point with every single client was estate planning, Get a will in place. We are the gaps and then you know, let's see what we can do to fill those gaps and I think life income is a really great benefit. That helps with that. That helps with that. Now, as long as insurance has been around, the most sold benefit in the market is life cover that pays as a lump sum. I think about just over 70% of all the benefits sold in the industry is life lump sum. Nothing wrong with life lump sum Absolutely. There's a need for it.
Speaker 3:There are lots of once-off big expenses paying off the bond, making sure your family still have a roof over their head, estate duties, cgt, all that sort of stuff. So there absolutely is a need for life cover. That being said, however, there are some risks involved with leaving a big lump sum to beneficiaries. We all know the lotto effect when someone gets a windfall and even those of us in this industry who should know better. When we get free money, you go and spend it and pay off things and go on holidays and buy gifts or whatever. And then when there's a little bit left over, you go, oh, I should probably invest some of this, you know, to take care of myself.
Speaker 3:And the reality is that very often, those beneficiaries don't come back with that lump sum.
Speaker 3:If they do come back with that lump sum, obviously you're going to invest it, hopefully they're going to make good investment choices and advisors are going to guide them. But there's always the risk of things happening in the market that you don't account for, like 2008, when the bubble burst and the real estate markets and everything crashed. 2020, when the pandemic happened. We couldn't have predicted any of that, so we couldn't have predicted that investment returns would have plummeted in those years. So those are the things we need to take into consideration when planning for our clients. So what a life income benefit does is it pays a monthly amount to the beneficiary for a set period of time, for however long it is that that life insured wants to make sure that that particular beneficiary is taken care of. So, whether you're leaving it to your children, to your spouse, to your parents, to your business partner, life income just ensures that there's a monthly income coming in every single month and life can just carry on the way it was before that person passed away.
Speaker 2:So there's a term you would establish on the underwriting or the quotation stage that you'd like to leave X amount per month to your wife for the next 15 years. Yes, absolutely, and then you work the premium, so you can have both.
Speaker 1:You can have a whole.
Speaker 3:You can have a combination.
Speaker 2:You could say let's settle the bond, settle the car with a lump sum, and then my wife needs an extra X amount per month for 50, my son and whatever, absolutely and you can do that.
Speaker 3:Can you do more?
Speaker 2:than one payment.
Speaker 3:You absolutely can. You can slice and dice it however you want. We always advocate for a combination of life lump sum and life income, because the life lump sum is going to go and pay off the bond and debt and all of that and then have the income benefit to take care of the monthly expenses. So you could leave a benefit to your spouse, as an example, for a fixed term, anywhere from six months to 20 years. So whenever you die, when you die, that benefit pays out for that amount, that term that you chose. You can leave it to a specific age. So if you're leaving it to your child as an example, every parent is different.
Speaker 3:So we've got either 18, 21 or 24. So some parents are once they're 18, they're out the house. They must sort for themselves. Others want to take care of them until they're done. With varsity You'll have that you can leave a benefit to someone until a retirement age. So that would have been the year that you would have retired, at 65 or 70 or 50 or whatever you selected.
Speaker 2:So, as Bronwyn said, so you have the wife or the spouse 20 years and then each child depending on how old to age 24. So there'll be johnny gets 10 years and mary gets 15 years and and the spouse gets 20 years, and that'll be a premium based on those three and then I'm also looking after my parents, and how would that?
Speaker 3:work. So that's, that's an excellent point. So we live in what's called the sandwich generation, where we're not just taking care of our kids, we're also taking care of elderly family members, parents, grandparents, whoever. So we have a whole of life, life income benefit, and when we say a whole of life here we're meaning the whole of the beneficiary's life. So if you've got an elderly parent and they are financially dependent on you, when you pass away, that benefit starts paying out to them and it'll continue paying until the day they die, whether that's at age 80 or 120, it doesn't matter.
Speaker 3:They are taken care of on a monthly basis.
Speaker 2:You probably don't underwrite the parents, you just put an age there underwrite the parents.
Speaker 3:You just put an age there, so there's obviously there is an element of gender and age and the likelihood of yeah, not no. We don't look, we don't no, we don't medically underwrite them we don't ask questions, we literally just gender and age. Um so. So for the benefits that go until a specific age uh, retirement age, child, child's age or whole of life there's an element of that in pricing. But for the fixed term ones, it's based on you as the life assured Life assured okay, a whole of life benefit.
Speaker 3:Again, depending on how you use it. If I'm using it for my 80-year-old father, it's going to be fairly cheap because the assumption is that he won't live past 90. But if I'm leaving a whole of life benefit to my 30-year-old spouse, as an example, I mean that's potentially another 60 years of paying out. So that's going to be very expensive using whole of life in that instance. So there you'd rather use a fixed term benefit or until a retirement age.
Speaker 1:And then do you have to prove that you are paying. You are taking care of your parents, so do you have to prove that you're giving them 10,000 Rand a month.
Speaker 3:Not that I'm aware of, I haven't come across that question from an underwriting perspective.
Speaker 2:Is there a maximum of monthly cover that you can take?
Speaker 3:The absolute maximum we allow is 150,000 Rand. So it also depends on you know, your financials and the multiples of salary how much life cover are you allowed to have? So we'll, obviously, based on your finances, we'll say look in total, this is the present value amount of cover you can have across lump sum and income, and then you can slice and dice that however you want, as long as at the end of the day, you haven't gone over that.
Speaker 2:Can it escalate?
Speaker 3:absolutely. It can escalate. You can have claims escalation. You can add the future cover protector to that as well. So as an example, my husband and I we've got two kids. We've got a life income benefit in place for each one of them. Should something happen to my hubby, the expenses are taken care of. They're in public school. Now they might, for some reason, we might decide to send them to private school and then expenses increase. Because we've got the Future Cover Protector. We can do that increase without having to go for medical underwriting.
Speaker 2:And in-claim.
Speaker 3:In-claim. It can escalate as well, but you have to select make sure that you've added in claim escalation. And then another really nice use of life income that I think people don't often think about is business partners. You can leave a life income benefit to a business that would continue if you're no partners, pass away. The other partner can still pay salaries and keep the lights on while you are sorting out buy and sell arrangements or deciding what it is that you're going to do with the business. So that's a really great option as well.
Speaker 1:Yes, and then, just in terms of that, do you have to have a relationship with that person?
Speaker 3:Obviously there needs to be insurable interest.
Speaker 1:So you know I can't just go and take a life income benefit out on anybody, so can a person have their wife and their side hustle, I mean?
Speaker 3:not that that's what you want, but I'm just saying why are you asking?
Speaker 2:It happens, did you not see?
Speaker 1:that whole Coldplay thing yeah.
Speaker 3:I mean, it's the reality. It does happen, as long as there's some sort of a terrible interest and like if you're looking after your husband's mom, for example.
Speaker 1:it can sort of be anyone, yeah.
Speaker 3:As long as they're, but I can't take cover out on you. I don't know you.
Speaker 2:I've met you today for the first time.
Speaker 3:So obviously I can't do that.
Speaker 2:There must be insurable interest between us. I think it's a fantastic way to ensure that income continues after you're not here. Absolutely, because often if you get a windfall, as you said, it can be spent in the wrong places and people come and they know that you've got a windfall. The family will come and say give me the money. It's always a problem.
Speaker 3:It happens time and time again.
Speaker 3:Stop that tapping and then just one last advantage of a life income benefit. So we know any life cover that we give a client, they have to pay a state duty or it's going to add to, obviously, the gross value of the estate and then we calculate a state duty. You know death and taxes. Life income has the advantage that it can reduce the overall deemed property value, because the Estate Duty Act tells us that when we want to calculate the deemed property value of a life income benefit we can discount it by 12%. So where a 2 million Rand life lump sum is 2 million Rand deemed property, a 2 million Rand life income present value, that's equivalent cover. I can discount that by 12% and so then the deemed property value of that's only 1.9%, 1.8% which reduces my, let's say, 9%, 1.8%, which reduces my total gross estate amount, and so that could also lead to a reduced tax bill at the end of the day.
Speaker 1:And then sorry, just one question on that Are the beneficiaries taxed on that as an income?
Speaker 3:So there's no income tax for the beneficiary but for the life assured there is that deemed property liability.
Speaker 1:So that spouse will receive that $10,000 and not have to do her tax returns. Yeah, just like the lonesome pays our tax.
Speaker 2:Tax-free yeah, Fantastic benefit.
Speaker 1:Thank you. Thank you so much for sharing Pleasure.
Speaker 3:Thank you.
Speaker 2:Thank you for listening. If you have enjoyed this podcast and would like to subscribe, please visit our website wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.