Buckle up, because we’re going to dive into a topic that’s a bit of a downer, but oh-so-important to discuss:
What happens to your debt when you ‘kick the bucket’ in South Africa?
Yes, it’s a bit grim, but understanding the ins and outs of this issue can save your loved ones a lot of trouble down the line.
When we pass away, we may leave behind more than just memories and a lifetime of accomplishments; we might also leave a trail of debt.
But, if you think those debts vanish into thin air, well, it’s time for a reality check.
Do Your Debts Join You in the Afterlife?
Before we begin, let’s get one thing straight: your debts don’t just get passed onto your family like some unwanted heirloom. They are generally not responsible for paying off any leftover debt unless they’ve co-signed a loan or are the secondary cardholder on your credit card.
But, if you’re married “in community of property,” it essentially means that you and your spouse share all assets and liabilities, including debts. This can have specific implications when one spouse passes away. However, effective solutions can be ensuring you have a will, credit life insurance and trusts in place.
In South Africa, your estate – essentially everything you own, from property and cars to investments and personal belongings – goes into what’s called ‘executorship’ when you die. An executor, usually someone you’ve specified in your will, will need to step in to manage the process. Their responsibilities range from settling outstanding taxes to paying off your debts.
Wills and Executors: Essential Pieces in Your Legacy Puzzle
Planning for the end is more than just having a will. It’s also about wrapping up our financial loose ends so our loved ones don’t have to.
The role of an executor is crucial. Their first task is to verify the will’s authenticity. Once validated, the executor becomes the protector of all assets – property, investments, or insurance policies, ensuring they’re well-managed throughout the probate process.
But the executor isn’t just a caretaker; they’re a detective too, uncovering all the deceased’s assets. From properties and bank accounts to investments, and yes, even their beloved porcelain cat collection.
The executor needs to pay off any outstanding debts and taxes. In South Africa, this also means filing the final tax return and settling any estate duty due to the taxman and creditors.
After debts and taxes are cleared, the executor can distribute the remaining assets as directed by the will. Through it all, the executor must keep beneficiaries informed.
The role of an executor can be daunting, especially with larger or complex estates, prompting many to appoint professionals like lawyers or accountants. Still, a trusted friend or family member can also serve as an executor, with the comfort of seeking professional help if needed.
Regardless of who is chosen, their ultimate responsibility is to act in the estate and beneficiaries’ best interests.
Paying Off Debts When You Die
Debt is a significant issue affecting many South Africans, and it has various implications on the country’s economy and social fabric. The circumstances are caused by a number of factors ranging from low income, unemployment, rising costs of living, to poor financial literacy and spending habits.
But despite our need for debt while we are alive, it’s about making sure your debts die with you, rather than outliving you and causing havoc for those left behind.
Life insurance policies and retirement funds usually provide a payout upon death, and these are typically not considered part of your estate. Instead, they go directly to the named beneficiaries, and creditors can’t touch these funds. Remember to read the fine print of your policies and choose the option that will safeguard your family after you are gone.
Now, what happens if your debt is larger than your estate, you may ask. Does it mean your loved ones will have to pay?
The short answer is a reassuring no.
But things can get a bit tricky: if your debts exceed the value of your assets, you’re said to be ‘insolvent.’
In this case, your entire estate is used to pay off the debt, and your heirs may not inherit anything. But remember, they’re generally not responsible for paying off the leftover debt unless they’ve co-signed a loan or are the secondary cardholder on your credit card.
Credit Life Insurance
Credit life insurance can play a key role in managing debt after death. This insurance can be particularly helpful as it ensures your debts don’t eat into the value of your estate or become a burden to your family.
Despite its somewhat misleading name, credit life insurance doesn’t just cover your debt in the event of death. Most policies also extend to disability and unemployment scenarios.
If you’ve been savvy enough to secure credit life insurance, your outstanding debt (whether it’s your mortgage, personal loan, credit card debt, or car loan) will typically be settled by your insurance provider upon your death. Your loved ones will breathe a sigh of relief, and your estate’s assets won’t be put on the chopping block to cover your debts.
When it comes to this type of insurance, don’t be shy to do your homework and ensure you’re not overpaying.
For every R1,000 owed on all credit agreements (mortgages being the exception), there’s a monthly credit insurance cap of R4.50.
Meanwhile, ordinary mortgage agreements have a R2 limit for each R1,000 owed.
In real terms, a R700,000 mortgage agreement should have a maximum monthly credit life insurance premium of R1,400. Remember, these rules apply to loans taken out on or after August 9, 2017.
One more thing to keep in mind: credit life insurance isn’t an automatic addition to every loan or credit agreement. Often, it’s an optional extra, although some lenders may require it, particularly for larger loan amounts or for borrowers deemed to be high-risk.
What if I Don’t Have Credit Life Insurance?
Your home loan or car finance is known as secured debts. If you still owe money on them, the lender may require the asset (the house or the car) to be sold to pay off the debt.
Unsecured debts, like credit cards or personal loans that do not have credit life, are paid off from the remainder of the estate’s assets after the secured debts have been settled.
This insurance is available to all South Africans with access to credit, whether they are under debt review or not. Credit life insurance policies can differ quite a bit, from their premium costs to coverage limits and terms and conditions. It’s paramount to read the fine print and understand exactly what you’re signing up for. Make sure you know what’s covered and what’s not.
A crucial thing to bear in mind, though: for pensioners or self-employed individuals, the law prohibits the selling of disability and unemployment cover under this insurance.
A little Planning Can Go a Long Way…
Writing a will and keeping it updated, staying informed about your debts, and securing credit life insurance and a life insurance policy can ensure your loved ones are not left dealing with financial drama.
While we can’t take our money or debts with us when we pass, we can definitely leave behind a well-managed financial legacy. Remember, life is uncertain, but your debts don’t need to be! It’s time to take control of your finances and ensure the afterlife of your debt is a tranquil one.
We may not know what happens to us after we die, but at least now we know what happens to our debts. Stay financially savvy, South Africa!