Dealing with life insurance in a will

Dealing with life insurance in your will

Dealing with life insurance in a will

Life insurance policies are a popular way for people to provide financial assistance to their loved ones in the event of the policy holder’s death, sickness or injury. Life insurance provides a cash payment to a nominated person or group of people. These people are known as the beneficiaries of the policy and are usually the spouse or children of the policy holder.

If you have taken out a life insurance policy it is important to be aware of how it is set up, as you may need to make provisions for it in your will to ensure the intended people receive the benefits.

A key consideration is the nomination of a beneficiary. Different types of beneficiaries will have different effects on your estate. In particular, your life insurance policy may name the beneficiaries of the policy individually or it may simply name your estate as the beneficiary.

Is your estate the beneficiary?

If your estate is to receive the proceeds of your life insurance policy, this may be dealt with in your will. If there are no specific provisions for your policy in your will, the proceeds will form part of your estate and be distributed according to the terms of your will.

By not making any specific provisions in your will for your life insurance policy, you may run the risk of the proceeds being used to pay any outstanding debts or other claims on your estate. The people intended to receive the benefit of the policy may then miss out on financial assistance.
You may also run the risk of someone challenging your will if they believe they haven’t been adequately provided for. If the challenge is successful, they may receive a portion of life insurance proceeds that was intended for someone else.

Setting up a testamentary trust under your will can ensure your life insurance policy is dealt with effectively. A testamentary trust gives you the ability to control how and when the life insurance proceeds are passed on to your beneficiaries. In addition it may give your beneficiaries tax advantages and provide a further layer of protection over the proceeds for their benefit.

Do you have named beneficiaries?

If you have named the beneficiaries directly in your life insurance policy, this will take precedence over the terms of your will. This is because the proceeds of the policy do not go to your estate and instead go directly to the beneficiaries.

In this instance your will should not have any provisions for the distribution of your life insurance policy proceeds. It is recommended that you review your life insurance policy to check that the named beneficiaries are still the people you want them to be. For example, there may be a divorce or relationship breakdown, or a nominated beneficiary may have passed away.

Life insurance attached to a superannuation policy?

If you have a life insurance policy included in your superannuation policy, this will be dealt with differently to a policy taken out in your own name. It is likely that the policy will be more restrictive. It may only allow you to name your estate as a beneficiary, or someone considered a dependant under superannuation law.

In this case, if you don’t name a valid beneficiary, the trustee of the superannuation fund could override your decision and distribute the funds appropriately.

If you have named your estate as the beneficiary, the proceeds of your life insurance policy may then be dealt with in the same manner as a policy taken out in your own name with the estate as the beneficiary.

If you have any questions arising from this post, please contact one of our expert estate planning lawyers by calling us on 07 3106 3016 or contacting us using the form on this page.

This article does not give legal advice and should not be relied upon as such. It is intended to provide general and summary information on legal topics, current at the time of first publication. You should seek professional legal advice before acting or relying on any of the content contained herein.