Who Gets My Life Insurance When I Die?

Published: April 3, 2018

The goal of life cover is to provide a lump sum of money to someone or for some purpose when you die. When purchasing a life insurance policy, you must nominate to whom this money will go.

Nominating a beneficiary for life insurance helps your loved ones to get the money more quickly than having to wait for your estate.

If you have a life insurance policy and pass away, the lump sum benefit will usually get paid to the person(s) you nominated to receive it, your beneficiaries. When completing your application form, you must submit the names and details of the recipient(s) who you want to receive the proceeds of your life insurance policy. Generally, people choose their spouse and/or children as their beneficiaries.

The amount your beneficiary will receive depends on your coverage and whether life insurance is held inside or outside your superannuation.

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What is a beneficiary?

A beneficiary is a person(s) you want your life insurance proceeds to be paid to when you die. Beneficiaries are generally those people dependent on your income, for example, your spouse or children. To appoint someone as your beneficiary, you must be the Policy Owner of the life policy, in which case you can usually nominate up to five beneficiaries.

If you choose multiple beneficiaries, you can decide which percentage of the lump sum each person should receive.

Should my life insurance beneficiary be my spouse or child?

Anybody with an insurable interest can be your beneficiary. An insurable interest is a relationship in which a person will suffer financial loss in the event of your death. Your chosen life insurance beneficiary could be your:

  • Spouse or long-term partner.
  • Children, your spouse’s children or your adopted child.
  • Parents or siblings.
  • Best friend.
  • Business partner.
  • Trust.

Who should your life insurance beneficiary be?

You may choose whoever you like as your beneficiary. Generally, it would be someone reliant on your income; your spouse, financially dependent children, parents or siblings. However, if you nominate a child, the allocated benefit will only be paid to them once they turn 18 years old.

Keep your beneficiaries and policy up-to-date, especially when significant life changes take place such as getting married, starting a business or having kids.

How to choose beneficiaries for life insurance

  • Look at the reasons you're buying life insurance in the first place. Determine who is financially dependent on you, what costs you want to be covered (mortgage, outstanding debts and funeral) and who you want to help, for example, a charity that's close to your heart.
  • Review your options. Do you want one beneficiary or multiple? A recipient does not need to be a person; it can be a business, a charity or your estate – as long as there is an insurable interest.
  • Have a Plan B: In case your primary beneficiary should pass away make sure you list a second (contingent) person to whom the benefit will be paid.
  • Take the beneficiary’s point of view. Be sure to consider how being your beneficiary might influence the relationship between other nominated (or un-nominated) people, and how each will react to receiving their designated share.
  • Be specific. Merely naming "my husband or wife or children" as beneficiaries can lead to speculation and confusion. Be sure to provide details regarding the person's names and how much each should be entitled to receive.

Mistakes to avoid when choosing a life insurance policy beneficiary

  • Failing to name a beneficiary of your life insurance policy. Proceeds can take much longer to reach your loved ones if they end up in your estate.
  • Not informing someone that they are a beneficiary. Your beneficiary will likely be the one who needs to notify your insurer of your death and start the procedure of lodging a claim. Make sure the people you've nominated to receive the pay-out know where they can find the policy details.
  • Forgetting to update your beneficiaries. If your circumstances have changed, for example, you've gotten divorced, be sure to update your list of beneficiaries.
  • Nominating a minor that cannot access your life cover proceeds until they turn 18. Also, consider what an 18-year-old might do with a large lump sum of money. You might instead want to arrange the proceeds go into a trust until your child is about 25 years old.
  • Not checking beneficiary details have been correctly captured in your policy documents. Incorrect information about a beneficiary can cause lots of confusion and might delay payment.

Avoid these mistakes by talking to a broker

Who can change the beneficiary on a life insurance policy?

Only the policy owner, the person who took out the policy and is paying the premiums, can make changes to the beneficiaries listed on your life cover. As the policy owner, you can change a nominated beneficiary or remove previous nominations at any time before a claim occurs. Most insurers will require you to fill out a change of beneficiary form.

Your life insurance beneficiary vs your Will

Your Will cannot override your life insurance beneficiary nomination. However, if none of your named beneficiaries is alive when you pass away, the life insurance proceeds will typically be paid to the policyholder's estate. The policy terms and conditions applicable to the nomination of beneficiaries are set out in your policy document.

If you don't nominate a beneficiary, your life insurance proceeds will be paid to your estate and will be distributed according to your Will, if you have one in place. If you do not have a Will, your estate will be subject to state intestacy laws. This can leave significant financial implications for your family.

When choosing to have your life insurance proceeds paid to your estate, you might want to consider including a testamentary of trust within your Will so that the objectives of your life insurance are met. For example, proceeds pass to your intended child beneficiaries at their predetermined age.

Life insurance beneficiary rules inside Superannuation

For superannuation law purposes, you are restricted to nominating either your Estate or a person who qualifies as a “dependent” to receive your super proceeds. If you do not name a valid beneficiary, the trustee of your super fund could override your decision and distribute the funds appropriately. You can make a binding or non-binding beneficiary nomination:

Binding nomination:

  • Provide a formal written direction stating who you want your account balance and death benefit to be paid to. This is a legally binding nomination and must be signed by you in the presence of two witnesses (over 18 years of age) who must each sign and date the declaration.

Non-binding nomination:

  • You nominate who you want to receive your fund and life insurance proceeds, but it is not legally binding. The trustee of your super fund will consider your wishes, but ultimately, they have complete discretion as to who will receive your death benefit.

Eligible life insurance policy beneficiaries within your super fund include:

  • Dependants: Your spouse and children who are financially dependent on you. A spouse refers to a person, regardless of their gender, with whom you are either legally married or who lives with you on a genuine domestic basis, in a relationship as a couple.
  • Legal personal representative: The person acting as the executor or administrator of your estate, shall distribute the proceeds according to your Will.
  • People in an interdependent relationship: Live-in adult carers or elderly parents and siblings with whom you have a close relationship and who you support financially may be nominated as a beneficiary.

Take note of potential tax implications: If life insurance is held inside of super and your beneficiary is not financially dependent on you, then the lump sum benefit paid to them will generally be taxed.

Frequently asked questions and answers

Do beneficiaries pay taxes on life insurance?

Depending on whether your life insurance policy is held inside or outside your superannuation fund, your beneficiaries might pay taxes on your death benefit. Life insurance proceeds from policies inside Super will generally be tax-free if paid to financially dependent beneficiaries (e.g. your spouse or young children). When paid to non-financial dependants, they can pay a tax rate of up to 35%.

Who inherits if a beneficiary dies?

If the primary beneficiary on your life cover dies, the sum insured will go to the next beneficiary on your list. This beneficiary is referred to as the secondary or contingent beneficiary. The continent beneficiary may only receive the benefit proceeds when the primary beneficiary dies.  If there is no contingent beneficiary, the benefit will usually go to your estate and be paid according to your will.

What happens if one of my beneficiaries die before me?

Contact your life insurance provider and change your beneficiary details. Your provider will supply you with the necessary "change of beneficiary" documentation which you should complete as soon as possible. You can usually either complete the form online or print it out, fill it in and post it to your insurer.

Do life insurance companies contact beneficiaries?

No. It is the responsibility of the nominated beneficiary to contact and notify the life insurance company in the event of your death. The insurer will provide the necessary claim forms and will stipulate whatever additional information they may require.  

Can a power of attorney override a beneficiary on life insurance?

Generally, power of attorney doesn’t give anyone the authority to sign a beneficiary designation form, but this varies from insurer to insurer. Usually, only the policy owner can make changes to a life insurance policy, including changes to the nominated beneficiaries.

Nominating a beneficiary can ensure you are getting the certainty you require as to who will receive your life insurance benefits. If you are unsure about your beneficiary options or who to nominate, you can fill in the quote form above or call a specialist on 1300 743 254.

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