Explore Life Insurance

While not a comfortable topic to discuss, it’s important all Australians understand how they can financially support their loved ones should they pass away or become critically ill or injured.

We’ve compiled a comprehensive guide to life insurance. This guide sheds light on who can be a beneficiary (the person who receives the life insurance payout), how to nominate beneficiaries and update your nominations, and how benefits (i.e. your life insurance payout) are split and taxed.

What would you like to learn about?

What does it mean to be a life insurance beneficiary?

When you apply for a life insurance policy, you can nominate a person/s who will receive a benefit if you pass away, or if you’re diagnosed with a terminal illness and are given a certain amount of time to live. Typically, spouses and children are nominated as beneficiaries for a life insurance benefit.

In order for your nominated beneficiary to receive payment directly, they must be over the age of 18. If they are under this age, their share is paid to a nominated trustee or legal guardian until they reach 18. The court may nominate a trustee or legal guardian if this becomes necessary.

The benefits of other types of life insurance, (e.g. trauma, total and permanent disability (TPD), or income protection) typically go to the policy owner.

The insured, policy owner, or beneficiary: who controls the policy?

It’s commonly assumed that the life insured has total control over the life insurance policy. However, this isn’t necessarily true if they aren’t the policy owner.

The policy owner is just that; the person who took out the life insurance policy to financially protect a person’s (the life insured’s) life. The life insured is the person whom the policy covers; if they pass away from an eligible event within the term of the policy, the listed beneficiaries receive a payout. Depending on the type of policy, the policy owner and the life insured can be the same person, or the policy owner can be separate from the life insured altogether.

Policy owners can make changes to the life insurance policy even if they’re not the life insured. They can nominate beneficiaries and amend these nominations. Furthermore, they are also responsible for ensuring the premiums for the 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 health, and are required to undergo a medical examination before the policy owner can take out cover on them. In many instances, a signature is required from the life insured (or their parent, if the life insured is a minor).

Most insurance companies will require you to prove you have “insurable interest” on non-family members. Insurable interest essentially means you suffer a financial loss due to a person’s death. As an example, if you co-owned a house with a friend, you would be financially impacted if they passed away and you had to take care of all of the mortgage repayments, rather than half (provided this was the arrangement with your friend before their death).

On top of this, the policy owner can also be listed as a beneficiary. If no beneficiaries are listed at all on the 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 their legal representative sees fit.

A nominated beneficiary cannot amend the life insurance policy on which they’re listed unless they are the policy owner. The only involvement they have in a policy is making a claim, and receiving their share of the benefit payout once the claim is processed through the life insurance provider.

What are the different types of policy ownership?

There are different types of life insurance ownership. These include:

Ownership typeDescription
Self ownershipThe life insured owns their policy. This can be more straightforward than other types of policy ownership, as the insured can amend their policy when they need, without requiring the consent of a policy owner.
Individual ownershipThis is owned by an individual. This type of ownership is a policy insuring the life of a separate person, not themselves.
Joint ownershipBoth the life insured and another person, usually their spouse, own the policy. They can jointly make changes to the policy as they see fit.
Cross ownershipA policy over a life insured that is owned by another person (typically their spouse).
Superannuation ownershipThe 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.

How are life insurance death benefits divided?

Life insurance death benefits can be divided among your beneficiaries in any way you see fit (although it is important to discuss these options with a financial advisor). 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 it 30/70.

Below is one example of how you might split the benefits for nominations on a form:

Name of beneficiaryAddressDate of birthRelationship% Split
1. Susan SmithXXX20/01/1970Wife40
2. Joe SmithXXX5/02/2000Son40
3. Henry WilliamsXXX1/10/1980Business partner20

What’s the difference between a binding and a non-binding nomination?

The Australian Securities and Investments Commission (ASIC)’s MoneySmart states:

  • A binding death nomination means the trustee of your super fund must pay your death benefit to your nominated beneficiary/beneficiaries. These binding nominations must be valid at your time of death. It’s important to note that these nominations typically expire every three years.
  • A non-binding nomination simply suggests to your super fund trustee who you want your death benefit payout to go to, but it is not set in stone. The trustee will use their discretion to distribute the payout as they see fit, taking into consideration any of your dependants, along with other relevant factors, including, of course, the nominations you made.

When do beneficiaries pay tax on life insurance death benefits?

Generally, nominated beneficiaries do not pay tax on their benefits payout if the life insured’s policy is owned 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.

There are also situations where death benefits may be taxed if these benefits are paid to help cover a revenue loss – that is, a revenue loss which is caused by the death of the life insured.

Tax on death benefits for life insurance held within super

According to the Australian Taxation Office (ATO), when the life insured passes away, the amount in their super fund is typically paid to their nominated beneficiary/beneficiaries – although, this depends on the type of nomination made (i.e. binding or non-binding).

Super paid to a beneficiary is called a ‘super death benefit’. This death benefit includes the money in the life insured’s super account at their time of death, as well as any life insurance cover through the fund. This may be able to be paid as either a lump sum or as an income stream – the latter being money paid out to the beneficiary gradually.

Dependant vs. non-dependant: the type of super death benefit payout

Only beneficiaries who are dependants under superannuation law are able to receive their benefit payout as a super income stream or a lump sum. Non-dependants are only allowed to receive a lump sum payment.

Adult children may receive an income stream payout if they’re under the age of 25 and are financially dependent on the life insured, or if they have a permanent disability (in which case they may receive this income stream after they turn 25). Children over the age of 18 must prove their financial dependency on the deceased in order to be considered a dependant.

Before the child turns 25, however, the income stream must switch to a lump sum payment.

When it comes to working out the tax on these death benefits and whether or not a beneficiary is a dependant, there are two laws considered:

  • superannuation law, which sets out who a death benefit is payable to
  • tax treatment (taxation law), which relates to how the death benefits will be taxed.
How superannuation law defines dependantsHow taxation law defines dependants
  • the life insured’s spouse or de facto spouse
  • the life insured’s child (any age)
  • a person in an interdependency relationship* with the life insured.

 

  • the life insured’s current or former spouse or de facto spouse
  • the life insured’s child under 18 years of age (children over 18 must be financially dependent on the life insured to be considered dependants)
  • a person in an interdependency relationship* with the life insured
  • any other person dependant on the life insured.

 

*The Australian Taxation Office (ATO) explains that an interdependency relationship is one where the deceased and the beneficiary have a close, personal relationship, live together, and provide for each other with financial or domestic support and personal care.

It’s important to note that adult children of the life insured are considered dependents under super laws, but not under taxation laws. Typically, this means that while they can still receive a death benefit, they may be required to pay tax on these benefits.

How does tax apply to these 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 payout. These payouts are comprised of taxed contributions the life insured has made to their super fund. An example of these types of contributions includes taxed income.
  • Taxable (untaxed) super payout. 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-dependants receive taxable super payouts, they will essentially ‘foot the bill’ and will be required to pay any tax owing. Dependants who choose to have their payout as an income stream will need to pay towards the taxable amount. If dependants are paid via a lump sum, they won’t need to worry about paying this tax.

The table below highlights how tax applies to lump sum and income stream payouts for dependant and non-dependant beneficiaries.

Tax dependant
or non-tax dependant
beneficiary
Benefit tax typePayout typeAge of beneficiary at the time
of life insured’s death
 Age of life insured at
their time of death
Tax amount owning by beneficiary
DependantTaxedLump sumN/AN/AN/A
DependantTaxableLump sumN/AN/AN/A
DependantTaxedIncome streamOlder than 60OROlder than 60N/A
DependantTaxableIncome streamOlder than 60OROlder than 60Marginal tax rate less 10% tax offset
DependantTaxedIncome streamYounger than 60Younger than 60Marginal tax rate less 15% tax offset
DependantTaxableIncome streamYounger than 60Younger than 60Marginal tax rate

 

Non-dependantTaxedLump sumN/AN/AMarginal tax rate or 17% (whichever is lower)
Non-dependantTaxableLump sumN/AN/AMarginal tax rate or 32% (whichever is lower)

This table is based on information from the ATO. It should be taken as a guide only.

Don’t forget: as of 1 July, 2007, non-dependants cannot receive death benefits as an income stream – they can only receive a lump sum payment.

To put the above table into practice, take a look at the following case studies:

Receiving super death benefits:

Case study one: Dependants between the ages of 25 and 60

Melissa is 26 years old. Her father passed away recently, and he had named her as one of his beneficiaries to his super life insurance.

Melissa was financially dependent on her father, so she is considered a dependant for super and tax purposes. As Melissa is 26, she must take the payout as a lump sum payment. She is not required to pay tax on this payout.

Case study two: Dependants over 60

Henry was nominated as his wife’s sole beneficiary to her life insurance, which was managed in her super fund.

Henry is over the age of 60 and was able to take on the benefit payout as an income stream. He is required to pay tax on the untaxed component of the benefit at the rate at which his income is taxed, less 15%.

Case study three: Non-dependants

Carri named her older sister Julia as a binding nomination in her superannuation account.

Should Carri pass away, Julia must receive her payout as a lump sum and would be required to pay the taxed elements of the payment at the rate her income is taxed or at 17% (whichever is lower).

For the taxable amount of the payout, Julia would be required to pay either the tax rate of her income or 32% (again, whichever is lower).

The above case studies are fictional and are not to be taken as personal financial advice. You should seek individual guidance from your financial adviser.

As every circumstance is unique, and the age at which the insured will pass away and the relationship between the parties at the date of death is unknown at the time the policy is taken out, it can be difficult to know in advance how much tax beneficiaries will owe on death benefit payouts. It’s strongly recommended that you talk to a professional tax agent to understand how your beneficiaries could be affected, and regularly revisit your nominations (and update them where necessary).

Tax information provided above is based on our interpretation of the law at the time this article was published. It does not constitute legal, taxation, or financial advice. You should always seek the advice of a qualified tax practitioner.

How to change your life insurance beneficiary/beneficiaries

There are certain circumstances that may warrant a change to your nominated beneficiaries. This is especially true if you’ve recently married or given birth. On the flip side, difficult circumstances, 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 that policy owner and you pass away, this portion will be paid to your legal personal representative, and they will distribute the benefits.

You can change your nominated beneficiary/beneficiaries at any point before a claim. Simply contact your life insurance provider 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.

Life insurance after divorce: updating beneficiaries

In the case of marriage breakdowns, it’s important that both you and your ex-partner carefully re-evaluate your life insurance policies. This can prove difficult in some circumstances, especially when it comes to joint and cross-owned life insurance policies.

If you’re not the policy owner of the life insurance policy, you may not be able to make changes to the policy – the policy owner will be required to make them. See the case studies below:

Case study four: The potential difficulty of a cross-owned policy

When John married Monica 12 years ago, he wanted to ensure his wife was financially protected in case he passed away. They took out a cross-ownership life insurance policy, where John was the life insured, and Monica was the policy owner and sole beneficiary.

Unfortunately, six years later the two divorced and were not on good terms. When they were splitting their assets, John asked that his life insurance policy ownership be transferred to his name.

While a valid request, Monica refused to transfer the policy ownership to John. When they first took out the policy, John gave Monica ownership rights. As Monica was happy to continue to pay premiums for the policy and would still be financially affected if he passed away, she was within her legal rights to decline.

John decided to take out a new life insurance policy on himself. As he had become a smoker after the first policy was taken out, his new policy was likely to cost more than the existing policy still held by Monica.

Case study five: From a joint policy to an individual policy

Emily and Ryan have decided to get a divorce. When the two first got married, they took out a joint life insurance policy. They have each other and their two children listed as their beneficiaries should the unexpected happen.

When they took care of their finances, they had a good look at their policy. Emily decided to transfer policy ownership to Ryan, and she would take out a new one to include her children as her beneficiaries if she were to pass away. Emily was able to tailor a policy to her particular needs – previously, she was contributing to more expensive premiums as Ryan worked a riskier job.

Frequently asked questions

How many beneficiaries can a life insurance policy include?

Many life insurance policies allow multiple beneficiaries, although the industry standard is up to five in total. This is because when more beneficiaries are listed, the claims process can become lengthier and more difficult.

Must I nominate beneficiaries?

It is not mandatory for you to nominate beneficiaries, however, you may not pass on financial support to the person you would have otherwise chosen.

If you pass away and you haven’t nominated any beneficiaries, the benefit will be transferred to the policy owner’s estate.

The above case studies are fictional and are not to be taken as personal financial advice. You should seek individual guidance from your financial adviser.

Protect your loved ones’ future today

While it seems morbid to plan for the worst-case-scenario, it’s extremely important you take the time to evaluate your medical condition, needs, and budget, which will give you the confidence to choose the right life insurance policy according to your circumstances.

We ease the burden of comparing multiple policies with our free-to-use life insurance comparison service. It takes minutes to receive a quote – a big step closer to safeguarding the financial future of your loved ones.

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