Taking out life insurance is one way a person uses his/her own money to provide financial help to family and loved ones if and when he or she dies. A life insurance policy provides cash payments to either an individual or a group that has been nominated by the policyholder. These are called beneficiaries and are normally, but not always, the policy holder’s children and spouse.
As with the distribution of any assets, beneficiaries of life insurance policies must be set up in advance before someone dies. Otherwise, the money may not go to the preferred person or people.
The first consideration is nominating a beneficiary. This could be a beneficiary who is a named individual, or your estate as a complete entity.
If you have reached a decision that your estate will receive the contents of your life insurance, then it simply becomes a part of your will. If you have made no specific provisions in your Will, its contents will become part of your estate and it will be distributed in accordance with the instructions regarding the distribution of the contents of your Will.
What happens if there are no specific provisions in the will for the life insurance contents?
One outcome could happen and that is the money could be used to settle any outstanding debts you may have or to finance any other claims lodged for your estate. This means your intended beneficiaries may not get a cent of the financial assistance that the life insurance was supposed to be used for.
A second outcome might be that someone may challenge your Will because they think they have not been provided for adequately. If this challenge ends successfully, that person may receive some of life insurance that should have gone to somebody else.
Set up a testamentary trust
To ensure your life insurance is managed correctly you can set up a testamentary trust that offers you the chance to control when and how the life insurance contents are given to your beneficiaries. Also, your beneficiaries may get tax advantages that provide an extra layer of protection concerning the proceeds of the life insurance that will benefit them.
Have you named the insurance policy beneficiaries?
If the beneficiaries are named in your life insurance policy, the Will has no influence on the distribution of the policy’s contents, as the amount goes straight to the named beneficiaries. There is no need in this case to mention the life insurance policy in the Will. What is important about named beneficiaries is that the names are up to date. If a divorce has taken place, for example, you may want to change the name of a beneficiary.
Life insurance as part of a superannuation policy
Sometimes, a life insurance policy is included in the superannuation policy, which means the former is handled differently with more restrictions attached. You may only be permitted to name your estate as a beneficiary or somebody who is considered a dependent in relation to superannuation law. If you are in this situation and have no named beneficiary, the trustee for the superannuation fund may override any decision you made and distribute the insurance policy contents appropriately.
You should provide beneficiary nominations to both the superannuation funds and the life insurance business so that you know where your life insurance and superannuation end up.
Most aspects concerning nominating beneficiaries are part of legal documents, so to help ensure you have completed all the necessary details you should consult with an estate lawyer who will check all the paperwork to ensure you comply with Queensland state law.