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Last Updated on 11 December 2018

Questions to Ask Before Choosing a Life Insurance Beneficiary


Life Insurance Beneficiary
Key Points
  • A life insurance beneficiary is the person, persons, or organisation that receives your life insurance payout. You can decide who should receive these funds.
  • Life insurance through super is managed differently than direct life insurance. Unless you make a non-binding nomination, the final decision about distribution of funds lies with your super trustee.
  • Review your life insurance beneficiary regularly as you may wish to change it if your circumstances have changed.

 

What is a Life Insurance Beneficiary?

A life insurance beneficiary is a person or organisation who receives a lump sum payout if you die or are diagnosed with a terminal illness. As the policy owner, you’re the one who chooses the beneficiaries.

You can choose to have a single beneficiary or multiple beneficiaries; most life insurers allow you to choose up to five beneficiaries. Your beneficiary doesn’t have to be a person; it can be a charity or an organisation. The decision is yours.

Contingent Beneficiary
Your life insurance beneficiary nomination is independent of your will. Regardless of what your will states, your life insurance payout goes to your nominated beneficiary.

Of course, there’s an exception to every rule. If your nominated beneficiary passes away prior to the claim being made, the life insurance payout reverts back to your estate. In this case, it is then managed by the executor of your will.

You can avoid this by nominating a contingent beneficiary, or a backup beneficiary. This is a person or organisation who would become a beneficiary if your nominated beneficiary passes away.

What if My Life Insurance is Through My Super?

Life insurance through a superannuation fund is managed slightly differently. Direct life insurance pays out from an insurer, while a benefit through a super fund is paid by the fund’s trustee. This does have some implications on choosing a beneficiary.

The death benefit for life insurance through super generally includes a life insurance payout plus the balance of the super account.

Dependants
Unlike direct life insurance, life cover through super will only pay out to a dependant such as your spouse, children, or someone who depends on you financially. You are not able to nominate an organisation but you can usually still nominate multiple beneficiaries.

Alternatively, you can nominate your legal personal representative, who must then distribute the payment as directed by your will.

Nominations
If you don’t nominate a beneficiary for your life insurance through super, it’s up to the trustee to decide who gets the benefit. This can create disharmony between family members and can be avoided. There are two types of nominations:

  • Binding nomination: This nomination cannot be disputed and your trustee must pay out to the defined person(s). However, binding nominations often expire after a few years, so make sure your nomination is current
  • Non-binding nomination: This nomination is more of a suggestion to the trustee, who is not legally obligated to follow it.

Who Can Be a Life Insurance Beneficiary?

Anyone over 18 can be a life insurance beneficiary. Think carefully about who you choose to be a beneficiary, as it’s not always as easy as it seems. Consider why you want the named person to have the funds: is it for education, debts, or something else?

Many people choose the following:

  • Spouse
  • Children
  • Parents
  • Close Friend
  • Business Partner

If you want to nominate your underage children, you can direct the payout to a trust, payable when they turn 18. However, what if the money is needed for their living expenses?

In this case you can leave it to your estate with explicit instructions in your will as to how the money should be distributed. You can also nominate a guardian in your will, someone you trust to manage the funds.

When Should I Nominate a Life Insurance Beneficiary?

Most life insurers will ask you to nominate a beneficiary when you set up the policy. At this time you’ll also be able to determine how you would like the benefit divided up in the case of multiple beneficiaries.

If you have life insurance through super, be proactive about making a nomination. Many people have default life insurance through their super and never realise that they need to nominate a beneficiary.

After you nominate a beneficiary, it is important to tell them. The life insurance fund is not obligated to contact the beneficiary if you die; the beneficiary is responsible for contacting the fund to make a claim.

Can I Change My Nominated Beneficiary?

Most funds will allow you to change your nominated beneficiary, though you will usually have to fill out a form before the changes take effect. The policy owner is the only person who can change the beneficiary.

You may wish to change your beneficiary if your circumstances change, for example if you get married or divorced, if you have another child, or if one of your beneficiaries passes away.

How Do I Make Sure the Right Beneficiary Gets the Payout?

Clarity is essential when nominating beneficiaries. Don’t simply say ‘my spouse’ or ‘my favourite charity.’ Be very clear about who you are nominating, and include details like their legal name, address, and contact number. If you have multiple beneficiaries, determine what percentage of the payout each should receive.

It’s a good idea to review your beneficiary at least once per year or when a major event occurs that may affect your choice. Always inform your beneficiaries if they are added or removed to your insurance and let them know if they will need to make a claim in the event of your death.

Does My Beneficiary Have to Pay Tax on the Funds?

Life insurance payouts are usually tax-free for the beneficiary. However, if your life insurance is through super the benefit may be subject to tax. Check the details of your policy through your fund to learn more.

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