Life insurance and beneficiaries

Placing a life insurance policy under trust can help to make sure the proceeds are paid to the right people. Naming a beneficiary is often a part of this process, but not everyone is clear what a beneficiary is and how it all works when the policyholder passes away.

Cutting through the jargon, if you’ve been named as a life insurance ‘beneficiary’ then you, solely, or as part of a group of people – beneficiaries – have been nominated to receive a lump sum payout from that life insurance policy. 

Naming someone as a beneficiary is the best way to help make sure the payout from a life insurance policy goes to the people it’s been bought to protect.

Anyone can. Most people make their partner or children beneficiaries, but it could be friends or other relatives, or even an organisation such as a charity. You may also choose to grant someone the role of trustee and beneficiary.

It’s a big decision and giving plenty of thought about who will really benefit from the support could help to decide who to include. Bear in mind that children can be beneficiaries but won’t be able to receive a payout until they’re 18 years old. 

When naming more than one person or organisation as a beneficiary, the policyholder will have to decide how much each is going to receive. For example, 40% to your partner, 25% each to two children and the remaining 10% to a charity.

It can be done; this ultimately depends how the policy is held and how it was set up.

If the policy is in a trust

Putting a life insurance policy into a trust could have tax benefits and make a payout quicker. Liability for tax depends on personal circumstances and tax rules, which may change over time.

A trust is a way of managing money that allows a trustee or trustees, to hold assets on behalf of the beneficiary or beneficiaries.

Trusts can get a little technical, but there are three main types:

• An absolute trust – this provides certainty as to who will benefit, but the policyholder doesn’t have full control as the beneficiaries can't be changed.
• A discretionary trust – this gives a wider pool of potential beneficiaries, and the policyholder can write what’s called an ‘expression of wishes.’ It outlines their intentions and offers guidance to trustees, but it’s at the trustees’ discretion as to who receives money from this policy. If there is a need to change the beneficiary over time there will need to be another written expression of wishes lodged with the trustees.
• A flexible trust – this is similar to a discretionary trust but allows the policyholder to name ‘default’ beneficiaries that may receive a payout if there's no appointment in favour of one or more of the potential beneficiaries during the trust period.

If the policy isn’t in a trust

It will form a part of the policyholder’s estate and will be payable to the policyholder’s legal representatives for the benefit of the beneficiaries of the estate.

The policyholder would usually advise the beneficiary at the time they set up their policy, but that’s not always the case. There are plenty of occasions where people are unaware they're a beneficiary of a life insurance policy.

The executor of the will or the life insurance trustee may contact the beneficiary about the policy if there is payout due. 

If the life insurance policy has been put into a trust, then a beneficiary is likely to receive a payout more quickly – often between two weeks and two months – because the policy won't be included in the estate and isn’t subject to a lengthy legal process or required to go through probate. It's worth noting that the proceeds will be paid to the trustees to distribute accordingly, an insurer will never pay direct to the beneficiaries.

The wait for the payout may be a little longer if the life insurance isn’t placed in a trust. Then the policy may become part of the estate, and a usual probate process will be applied before a payout- to make sure the correct person is in receipt of the funds.

If the policy has been put into a trust, there will usually be a tax-free lump sum as it’ll be exempt from inheritance tax. If the policy was not in trust, the payment should be added to the total value of the estate for inheritance tax purposes. 

If the policy was in joint names, it will pay to the joint policyholder.  If the joint policy holder is someone other than a spouse or civil partner, half the policy proceeds may be subject to inheritance tax in the deceased’s estate.

The government site has far more detailed information on inheritance tax. ^{Footnote [1]}  

The type of trust will determine what happens on the death of a beneficiary, the payout will go to the trustees to distribute in accordance with the terms of the trust.

If the policy is not under trust, it will be paid to the policyholder's personal representatives for the benefit of the remaining beneficiaries of the estate.