Life Insurance Beneficiaries

Find out who can get your life insurance payout and the rules around beneficiaries with Savvy.

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, updated on July 10th, 2023       

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Choosing the beneficiaries of your life insurance payout is one of the biggest decisions you’ll make when you purchase a policy. When you’re deciding what to do, it’s essential you understand the rules around beneficiaries, which is where Savvy can help.

Find out how beneficiaries are nominated and the regulations around who has power over your policy after you pass away right here with Savvy in our informative guide.

What are life insurance beneficiaries?

Life insurance beneficiaries are people, a group of people, an organisation or a trustee you name to receive your life insurance policy payout in the event of your death or diagnosis of a terminal illness.

When you apply for a policy, you’ll be asked to choose a beneficiary, or beneficiaries, who will receive your payout if you die. In most cases, people will choose their spouse or long-term partner, children, best friend or parent to receive their life insurance payout.

The rules around beneficiaries mean you can name one, two or more people to receive your money. If naming more than one beneficiary, you will need to nominate the percentage of the funds each recipient will receive. Primary beneficiaries will be the first to receive funds, and contingent beneficiaries will only receive funds if the primary beneficiary dies or becomes disabled.

How should you choose your life insurance beneficiary?

Picking a recipient or recipients for your life insurance payout might seem like a straightforward process, but there are a few factors to think about before deciding. These include:

Remember why you took out the policy

Consider the reasons you're looking for coverage. Is it necessary to leave your family with financial security when you pass away? If that's the case, your partner or spouse and/or children may be your first choice of recipient. However, if you're running a company with others, you may wish to give your business partner or partners a financial safety net to ensure the business survives after you've gone. Aim to choose a life insurance policy and a beneficiary who will allow you to achieve your objectives, even after you die.

Be aware of the implications if nominating someone under 18 years of age

It may seem common sense to leave your life insurance policy to your children to ensure they are looked after in your absence. However, if your child is the intended recipient of your life insurance payout, they must be over 18 to receive the money. If they’re under 18 at the time of your death, the funds may be held by a legal guardian or trustee until they reach maturity, or funds can be allocated by the trustee to be used for the benefit of the minor. 

Think about your nominated individual’s life situation

Your beneficiary's life circumstances may have a significant role to play in your choice. For example, if you name a family member who receives disability payments as your beneficiary, the lump sum may push them over their low-income threshold and leave them worse off in the long term. You should seek qualified legal advice before deciding how you distribute your life insurance benefit in the event of your death. 

Be specific

You should also be careful when naming beneficiaries of your life insurance, and ensure all their contact information is kept up-to-date. For example, if one of your children passes away, you need to decide if you want your other child to be the recipient of your payout, or would you prefer the money goes to the deceased child's family (if they have one).

Keep your policy up-to-date

Failure to update the beneficiaries on your life insurance policy is a common mistake that is frequently made. For example, imagine you're unmarried when you purchase your policy, and decide to make your parents the primary beneficiaries. If you marry and don't update your policy, your parents would still get the insurance money and your spouse could be left without anything from your policy if you haven't updated your policy's details. If you look at your life insurance policy every year, you can ensure the beneficiary designation is updated.

When might I need to update my life insurance beneficiaries?

Doing a regular review of your life insurance policy will ensure your details are kept up to date, particularly if something significant has taken place in your life like a marriage, birth or death. Some of the life events which could trigger a beneficiary update include:

  • One of your original beneficiaries dying
  • Having children
  • Divorcing or separating
  • Inheriting money
  • Clearing or taking on significant debt
  • Changing jobs or getting a pay rise
  • Getting engaged or married
  • Your children moving out of home or becoming independent
  • Completing your school fee payments

Most professionals will say it’s a good idea to review your policy every 12 months or when a close family member passes away.

What happens if I don’t have any life insurance beneficiaries?

If you pass away and have no beneficiaries listed on your life insurance policy, your payout will be paid directly into your deceased estate and will be distributed as per your will. However, if you’re alive and make a claim on the grounds of critical or terminal illness, you’ll receive your payout if you haven’t named any beneficiaries.

A beneficiary named in a life insurance policy can't make changes to the policy unless they’re also the policy owner. They must file a life insurance claim and wait for their portion of the payoff to be processed and arrive in their nominated bank account. You may want to include this information in your will if you’re the policyholder.

Frequently asked questions about life insurance beneficiaries

Do I still need a will if I’m nominating life insurance beneficiaries?

Yes – having life insurance provides “new” money to assist loved ones in paying for the costs of living after you're gone. A will specifies what you want to happen to your current assets when you die. The money you get from your life insurance policy won't just pay for your funeral, but can be used to help with expenses like school fees or mortgage repayments after you pass away. Also, unlike assets in a will, a payment from an insurance policy does not need to go through probate.

In contrast, a will must go through probate before being used to distribute the decedent's real estate, personal property and other assets. This is the legal procedure wherein a court verifies the validity of a will and the proper execution of its terms.

How do life insurance beneficiaries through superannuation work?

The rules around naming beneficiaries of a superannuation life insurance policy work the same way as if you purchased a standalone policy. In most cases, you can nominate beneficiaries with your super fund when you take out a policy. However, you’ll need to contact them if you want to change or add a beneficiary to your policy.

Do beneficiaries have to pay tax on the money they receive?

The beneficiary of your life insurance policy, whether your spouse or a child, will be exempt from paying taxes on the death benefit they receive. This holds true for many types of insurance, including life (in the event of death), critical sickness and total and permanent disability (TPD).

What happens if my claim is rejected?

If your claim is denied, it’s worth first double-checking with your insurance company if the incident you’re claiming is included under your policy. There are many reasons why life insurance claims may not be paid, including if your incident is part of the general exclusions.

If it’s covered and the claim has still been rejected, you can seek legal advice to resolve your claim. You can also file a complaint with the Australian Financial Complaints Authority (AFCA) or go to court if your claim is denied again or if the amount the insurer agrees to pay is contested.

What happens if someone contests a life insurance beneficiary?

Unlike a will, life insurance policies do not have to go through probate and aren’t subject to immediate judicial review.

A life insurance policy is a legally binding contract between the policyholder and the insurance provider. For a third party to gather adequate proof to establish that the named beneficiary is wrong is unusual, but legally possible.

Someone could contest beneficiary status on the grounds of significant life changes or a sudden change, such as if you change your policy at the end of your life. In addition, a person could build a case that you weren't of sound mind when naming your beneficiaries.

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Savvy does not compare all life insurance policies or providers currently operating in the market. Any advice presented above or on other pages is general in nature and doesn’t consider your personal or business objectives, needs or finances. It’s always important to consider whether advice is suitable for you before purchasing an insurance policy.

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