By Chris Maartens, Insurance Specialist at Africorp Advisory Services
Reflecting their bearish view on the rand, South African expatriates holding rand-denominated life policies are increasingly opting to convert their policies to the dollar, providing a hedge to the rand while exempting them from domestic estate tax.
By taking out an offshore life insurance policy denominated in the most widely-used global currency, the US dollar, you are protected against the financial impact of a life-changing event – no matter where you and your family may find yourselves in the future.
Given the increasing volatility of emerging market currencies and the increased number of South Africans choosing to emigrate, the need for cover in stable currencies and a comprehensively-structured life policy has never been more critical.
Additionally, the movement of goods, services, technology and capital across international borders has led to the world’s economy becoming integrated and interdependent, making it increasingly difficult to predict where one’s future commitments will lie.
If you have, or could in the future have, offshore liabilities, such as a bond, children’s education costs or estate duty in a foreign country, risk protection denominated in dollars is critical to ensure that your liabilities are fully matched.
Critically, the dollarisation of South African life insurance policies also enables South Africans who have chosen to move or work abroad to match their offshore liabilities, offering an effective strategy in creating offshore wealth for South African families.
Importantly, some domestic policies also do not offer disability cover for South Africans that have relocated abroad. Why would you maintain a rand domestic life policy when you are earning dollars or foreign currency?
Exemption from hefty SA estate tax
While rand-based life insurance policies are deemed an asset in the estate of a deceased and are thus subject to estate duty, offshore life policies – when correctly structured – are not domestically held and are thus not estate-dutiable.
In South Africa, Estate Duty is levied on the dutiable value of an estate at a rate of 20% on the first R30 million and at a rate of 25% on the dutiable value of the estate above R30 million, so the addition of any local life policies into a person’s Estate Duty calculation can create a significant increase on the Estate Duty payable.
Improved access to proceeds for beneficiaries abroad
Additionally, dollar-based policies can payout to an offshore trust or individual, while premiums can be funded from an offshore dollar account. They are also commonly used to structure buy-and-sell agreements between shareholders based abroad.
A dollar life policy is the perfect solution for people with beneficiaries offshore. It takes the heirs out of any forex complexity, as payment will be made in US dollars anywhere in the world.
Case Study: Life policyholder lives in SA, beneficiary abroad
Consider a father who lives in Johannesburg, holds a South African life insurance policy, and whose son – the beneficiary of the policy – lives in Ireland.
Should the father pass away, the South African life insurer will only pay the proceeds of the policy to a local South African bank account in rands. The son will then need to transfer the proceeds abroad.
While the South African Reserve Bank will allow the proceeds to be transferred to a beneficiary offshore, the rules are incredibly complex.
A far simpler option is for the father to hold a dollar-based life insurance policy, as the funds are already offshore, so there will be no foreign exchange issues and no tax clearance requirement.