Life insurance beneficiaries

Placing your life insurance policy under trust can help to ensure the proceeds are paid to the right people. Naming a beneficiary is often a part of this process, but you may not be sure what a beneficiary actually 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 your beneficiary is the best way to help make sure the payout from your 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.

It’s a big decision and giving plenty of thought about who will really benefit from your support could help you 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, you’ll have to decide how much each is going to receive. For example, you might want to give 40% to your partner, 25% each to both of your children and the remaining 10% to a charity.

If the policy is in a trust

Putting a life insurance policy into a trust could have tax benefits and make a pay out quicker ^{Footnote [1]}.

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 – here you can have a wider pool of potential beneficiaries and you can write what’s called an ‘expression of wishes’. It outlines your intentions and offers guidance to trustees, but it’s at the trustees discretion as to who receives money from your policy. If you wish to change your beneficiary over time you’ll need to write another expression of wishes and lodge it with the trustees.
• A flexible trust – this is similar to a discretionary trust but lets you 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

You may be able to change the beneficiary, but you’ll need to contact your insurer for advice. It will depend on the type of policy you have and how it was set up.

The policyholder would usually tell you 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.

As a beneficiary, the executor of the will or the life insurance trustee may contact you about the policy and when you might expect to receive a payout.

If you’re wondering whether or not you’re a beneficiary, getting in touch with the executor of the will or a trustee is a great place to start.

If the life insurance policy has been put into a trust then you’re 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.

You may have to wait a little longer for a payout if the life insurance isn’t placed in a trust. Then the policy may become part of the estate and may need to go through the usual probate process before you receive a payout.

If the policy has been put into a trust, you’ll get 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 ^{Footnote [2]}. 

If the policy was in joint names and you're the surviving spouse, the payout will not be included in the estate and will be free from inheritance tax.

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.