Life insurance is designed to provide a cash payment in the event of your death. It is likely that you’ve established this insurance to support your family in paying down debts, and/or providing an ongoing source of income.
You can either hold your life insurance through a policy taken out personally or owned in the superannuation environment. In the case of the latter, it can be paid for via personal contributions or an annual partial rollover of funds.
Depending on the ownership structure of your policy, your unique situation and wishes, making sure the right people receive the money in a timely and tax efficient manner is something you need to seriously consider.
What if You (or another individual / entity) are the owner of the policy
If you are the owner of the policy, the proceeds will go to your Estate and be dealt with under your Will. You must specify in your Will, who is to receive those proceeds. If you do not specify the recipient in your Will, the proceeds will be paid to your residual beneficiaries.
If you have outstanding debts, or other claims against you at the time you die, then your Estate assets (including the proceeds from the policy) may be used to pay these debts and obligations. This may mean that your dependants miss out.
Furthermore, a person who is not adequately provided for in your Will may challenge your Will. Potentially they could take a larger portion of the insurance proceeds than you intended.
However, if another individual or entity eg. your spouse is the policy owner, the proceeds will be paid directly to them after your death.
Naming a beneficiary to receive the proceeds:
If you name a beneficiary under the policy, the proceeds will not be paid to your Estate. Instead, they will by-pass your Estate and go directly to the named beneficiary.
If the proceeds go directly to a beneficiary, the beneficiary will receive the proceeds outright at that time. It should be noted, that if the beneficiary is a child, they will be entitled to the full amount of those proceeds when they reach 18. This could be too early for them to properly handle the money.
If you own your life insurance outside of super, as in the above case, you should consider the above scenarios. Consultation with an estate planning professional could be time well spent and ease any concerns you may have.
What if the Insurance is owned through super
If you hold a life insurance policy in the superannuation environment, then you need to consider a number of additional issues.
Firstly, your options regarding who receives the proceeds are more restricted than if the policy is held outside super, and the tax considerations are more complex.
You are restricted to nominating either your Estate or a person who qualifies as a “dependant” for superannuation law purposes to receive the super proceeds. Generally, a spouse or de facto spouse, a child or a person in an interdependent relationship with the deceased qualify in this case.
Non-binding or binding beneficiary nomination.
If a binding death benefit nomination is allowed, you can nominate one or more dependants or your legal personal representative to receive your super.
If a non-binding nomination was made by the deceased, the trustee of the provider may:
- use their discretion to pay in accordance with the non-binding nomination; or
- make a payment to the deceased's legal personal representative (Executor of the deceased estate) for distribution according to the instructions in the deceased's Will.
Furthermore, where the life policy is held through super then there may be an additional layer of tax on the payout to the beneficiary. This will be the case if the beneficiary is not a “dependent” for tax law purposes.
No nomination / No Will
The consequences of not ensuring the right people receive your life insurance proceeds may include:
- The trustee of the insurance provider using their discretion to decide which dependant or dependants the death benefit is paid to.
- Other people making a claim for the proceeds.
- The intended recipients not receiving proceeds in a timely manner.
- The intended recipients not receiving any funds at all, for some of the reasons mentioned above.
Speak to your Insurance House Life Adviser for further guidance on this matter.
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way.
Tim Hawker, Mike Townshend, Craig Matthews, Nicky Hamilton-Morris and Mark Oliver of Investment House Echuca T/As Insurance House Life ABN 90 105 663 401, are Authorised Representatives of Bombora Advice Pty Ltd ABN 40156 250 565, Australian Financial Services Licence 439065