While not a comfortable topic to discuss, all Australians need to understand how they can financially support their loved ones if they passed away or became critically ill or injured.
To help, this guide sheds light on who can become a life insurance beneficiary, the beneficiary rules in Australia, how to nominate beneficiaries and update your nominations, as well as how benefits (i.e. your life insurance payout) are split and taxed.
First off: What is a life insurance beneficiary?
A life insurance beneficiary is a person, group of people, trust or organisation that you nominate to receive an agreed payout, if you pass away or are diagnosed with a terminal illness (and are given a certain amount of time to live).
You can nominate beneficiaries when you apply for life insurance and can choose who and where benefits are paid. A primary beneficiary is the first person you nominate, but if something were to happen to them (see further down) you can nominate a contingent beneficiary (or a second beneficiary) to take their place.
Who can I nominate as a life insurance beneficiary?
There aren’t many restrictions on naming beneficiaries – you can usually nominate who you like, but to receive a payout they must be over the age of 18. In most cases, beneficiaries are family, friends and loved ones, but can also be trusts or organisations.
Common examples of beneficiaries include:
- family members
- business partners.
When a nominee is under the age of 18, their benefit share is paid to a nominated trustee or legal guardian until the nominee reaches 18. A court may nominate a trustee or legal guardian if necessary.
The payouts of other types of life insurance (e.g. trauma, total and permanent disability (TPD), or income protection) typically go to the policy owner.
Who controls the life insurance policy?
It’s commonly assumed that the insured party has total control over their life insurance policy. However, this isn’t necessarily true if they aren’t the policy owner.
A policy owner – is the person who took out the life insurance policy to financially protect a person’s life. Whether their own life or someone else’s.
To insure another person for a life insurance policy, insurance providers usually require approval from this person. They may also be required to provide information about their lifestyle, occupation and undergo a medical examination. A signature may also be required from the person who will be insured.
If the life insured person passes away from an eligible event within the term of the policy, the listed beneficiaries receive a payout.
Example: Mary’s husband, Mitch, has always earned more than her and provides for the family. Knowing she wouldn’t be able to keep up with the bills if something were to happen to her husband, Mary decides to take out a life insurance policy for Mitch to protect her if something happened to him.
While Mitch is the life insured, Mary is the policy owner because she’s the one who took out the policy.
What are the different types of life insurance policy ownership?
There are different types of life insurance ownership that beneficiaries should be aware of. These include:
|Self-ownership||The life insured owns their policy. The insured person can amend their policy when they need, without requiring the consent of a policy owner.|
|Individual/cross ownership||A third party, such as a spouse, owns a policy relating to the life insured. For example, your wife has a life insurance policy that covers your life is something were to happen.|
|Joint ownership||Both the life insured and another person, usually their spouse, own the policy. They can jointly make changes to the policy as they see fit.|
|Superannuation ownership||The trustee of the life insured’s super fund owns their life insurance. Any changes required will need to be processed by the fund.|
|Corporate entity or trust||Owned by the life insured’s employer, for example.|
Can beneficiaries make changes to the life insurance policy?
If a beneficiary isn’t the policy owner, they won’t be able to amend the policy. Only policy owners can make changes to the life insurance policy, even if they’re not the life insured.
Policy owners can nominate beneficiaries and amend these nominations as they see fit. They’re also responsible for ensuring the premiums for their policy are paid.
Typically, life insurers require input from the person for whom the policy is intended. This person may be asked a range of questions about their lifestyle, occupation and are required to undergo a medical examination before the policy owner can take out cover on them. A signature is often required from the life insured (or their parent if the life insured is a minor).
For example, if you co-owned a house with a friend, you would be financially impacted if they passed away and had to take care of all the mortgage payments, rather than half (provided this was the arrangement with your friend before their death). A policy owner may be listed as a beneficiary.
As another example, some insurance companies might not let you nominate someone you don’t have a close relationship with, at least not without asking some questions first. Check the relevant product disclosure statement (PDS) to see how this works and who might be eligible to receive your life insurance proceeds.
How are payouts divided between life insurance beneficiaries?
Life insurance death benefits can be divided among your beneficiaries, although it’s important to discuss these options with a financial advisor or professional and be aware of any specific beneficiary rules that apply to your policy.
Death benefits are split as a percentage share, with the entire amount of benefits payable being 100%. For two nominated beneficiaries, for instance, you could split their benefits 50/50, or you could split them 30/70.
What happens to a life insurance policy with no beneficiary?
If no beneficiaries are listed on a life insurance policy and the life insured passes away, the payout goes directly to the policy owner. However, if the policy owner is the deceased, the benefits would go to their estate and would be divided as per their will.
A nominated beneficiary can’t amend the life insurance policy unless they’re also the policy owner. The only involvement they have is making a life insurance claim and receiving their share of the benefit payout once the claim is processed through the insurer.
If you’re a policyholder, you may wish to include this information in your will.
How do I change my life insurance beneficiaries?
If you’re the policy owner, you can change your nominated beneficiary/beneficiaries at any point before a claim. Simply contact your insurer for the correct documentation, fill out the required form, and return it as soon as possible.
To avoid delays, be sure to answer each question on the form as carefully and as accurately as you can. Many insurers suggest you seek professional estate planning advice before nominating any beneficiaries.
When should I update my life insurance beneficiaries?
You should update any life insurance beneficiary list as soon as any significant changes occur in your life. A variety of major life events may warrant a change to your nominated beneficiaries, including:
- The death of a beneficiary. Difficult situations, like the passing of your nominated beneficiary, will mean you’ll need to update your policy to reflect who you want to leave benefit payouts to. If one of your nominated beneficiaries passes away and you don’t update your policy, the portion percentage of that individual’s benefit will generally return to the policy owner. If you’re the policy owner and you pass away, this portion will be paid to your legal personal representative, and they’ll distribute in accordance with your will.
- You become married or have a baby. You may choose to update your beneficiaries if you get married, change partners or welcome a baby. This could also mean adjusting the amount you’re insured for in your policy. You may also wish to list any stepchildren through remarriage as beneficiaries.
- You divorce your spouse. It’s vital that both you and your ex-partner carefully re-evaluate your life insurance policies in the event of marriage breakdowns. This can prove difficult in some circumstances, especially when it comes to joint and cross-owned life insurance policies. If you’re not the life insurance policy owner, you may not be able to make changes to the policy – the policy owner will be required to make them.
- Your dependents change. If your children become older, move out of home and are no longer financially dependent on you, you may choose to remove them as beneficiaries from your life insurance policy. Of course, you may wish to leave them assets, property and belongings separate to your life insurance payout as a part of your will.
What about beneficiaries in superannuation?
Many people are insured through their super fund instead of through a standalone insurer. A beneficiary in superannuation is a person or people you nominate to receive funds from your super account or an insurance payout when you pass away.
Unlike standard life insurance, there are several unique ways you can nominate beneficiaries through a super fund.
- A binding death nomination. You can detail how you want some or all of your superannuation benefits to be distributed when you die. According to the Australian Government Treasury, nominations are valid for a maximum of three years and lapse if they’re not updated.1
- A non-binding death nomination. You can suggest to your super fund trustee who you want your death benefit payout to go to, but it isn’t set in stone. The trustee will use their discretion to distribute the payout as they see fit, taking into consideration any of your dependents, along with other relevant factors, including, of course, the nominations you made.
- A reversionary beneficiary. If you receive a regular income stream from your superannuation fund, you may nominate a beneficiary who’ll continue to receive these payments in your place if you pass away.
- A non-lapsing binding death benefit. Unlike a standard binding death nomination which is valid for three years, a non-lapsing binding death benefit nomination can remain in place forever or until you replace it with another nomination.
Do beneficiaries pay tax on life insurance death benefits?
Generally, nominated beneficiaries don’t pay tax on their benefits payout if the life insured’s policy is held by an individual and is outside of superannuation. However, if the life insurance policy is held inside a superannuation fund, tax payments on these benefits are treated differently.
See the ATO for more information on how tax works on death benefit payments.
How does tax apply to super benefits?
Death benefits in superannuation are comprised of the following components: a tax-free super payout and a taxable super payout.
- Tax-free (already taxed) super These payouts are comprised of taxed contributions the life insured has made to their super fund. An example of these types includes contributions from already-taxed income.
- Taxable (untaxed) super These payouts are comprised of super contributions that have not been taxed as of yet; this can include contributions the life insured’s employer has made.
When non-dependents for tax purposes (e.g. the life insured’s current or former spouse, de-facto spouse, child under 18, interdependency relationship partner or any other dependent) receive taxable super payouts, they’ll essentially ‘foot the bill’. They will be required to pay any tax owing.
Dependents who choose to have their payout as an income stream will need to pay towards the taxable amount. If dependents are paid via a lump sum, they may not have to pay this tax.
This information is general in nature and is not to be relied on as advice. Consult the Australian Tax Office (ATO) or a tax professional for more information.
Life insurance beneficiary FAQs
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