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.
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.
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:
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.
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.
There are different types of life insurance ownership that beneficiaries should be aware of. These include:
| Ownership type | Description |
| 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. |
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.
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.
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.
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.
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:
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.
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.
Death benefits in superannuation are comprised of the following components: a tax-free super payout and a taxable super payout.
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.
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.
You don’t need to nominate beneficiaries, however, failing to do so means your loved ones may not receive financial support when you pass away. The payout will be transferred to the insured person’s estate if they pass away and haven’t nominated any beneficiaries.
Yes, your beneficiaries should know if they are listed on your life insurance policy. In the event of your death, they’ll likely be the ones who need to inform your insurer that you’ve passed away and start a claim. They will need to be aware of your policy details to make a claim.
Generally, nominated beneficiaries don’t 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.
While it seems morbid to plan for the worst-case scenario, it’s crucial you take the time to evaluate your medical condition, needs and budget, which will give you the confidence to choose a life insurance policy for your circumstances.
We make it easy to compare multiple policies with our free-to-use life insurance comparison service. It takes just minutes to complete a quote and you can compare features from a range of policies offered by our partners.
