What to know about choosing or being a life insurance beneficiary

Life insurance policies are designed to pay out a sum of money to someone (called the beneficiary) if the policyholder dies during the term of the policy. You nominate the person or people you want to be your beneficiary. You can even nominate a charity.

If you pass away, your beneficiary will receive a lump sum payment that can help them financially at a very difficult time.

You can have more than one life insurance beneficiary and you can nominate whoever you choose to be yours. If you name multiple beneficiaries, you can decide what percentage to give each of them. Changing beneficiaries later down the line may be possible, depending on the type of policy you have and how it’s set up.

Your beneficiary could be:

• Your spouse or partner
• Your children or step-children (even if they’re minors)
• Your siblings
• Your grandchildren
• A friend
• Your parents
• A charity that you support

You can even nominate people as a group. For example, ‘My grandchildren’ would include any grandchildren who come along in the future.

How does being a beneficiary work in the UK?

If you die while your policy is active and the claim is valid, the payout will go to your named beneficiaries. If the beneficiary is a minor, they’ll only be able to directly receive the money when they reach 18.

If your policy is written into trust, the payout will be paid out to the trustees and then go directly to the beneficiary. It won’t be counted as part of your estate for inheritance tax purposes.

If you haven’t put it into trust, any payout will form part of your estate and could be subject to inheritance tax. It generally takes much longer to pay out if the policy isn’t in trust.

How you make the decision when choosing life insurance beneficiaries is entirely down to you. Most people want a life insurance payout to ease financial stress for those left behind when they pass away. So it can be a good idea to think about who depends on you financially and whether they might struggle to pay the bills if you pass away.

A Post Office study showed that 75% of respondents took out life insurance to take care of their family. Many people nominate their spouse or partner. But that won’t be right for everyone. It’s also a good idea to think long term – is your situation likely to change in the future? You might get divorced, marry or have children.

If your situation isn’t straightforward, it can be sensible to speak to a professional adviser or solicitor. They can help you work out what’s best for your particular circumstances – particularly as some things can’t be changed later.

If your life insurance isn’t in a trust, you might be able to change your beneficiary, but it ultimately depends on your policy. You’d need to contact your insurance provider to see if it’s possible for you.

If your life insurance policy is in a trust, it depends on the type of trust you have. There are three main types of life insurance trust:

• Discretionary trust: You write a letter of wishes that explains what you’d like to happen, but your trustees don’t have to follow that. They can choose who will benefit and how much they’ll get.
• Absolute trust: You choose your beneficiaries when you set it up, and how the payout would be split. But you can’t change the beneficiaries, no matter what – even if you divorce or have more children, for example.
• Flexible trust: You name one or more beneficiaries at the start, called the default beneficiary. You can choose discretionary beneficiaries as well. But the trustees can change the default beneficiaries and the amount paid.

A life insurance payout doesn’t generally go directly to the beneficiary. How it’s paid out varies according to whether the policy is written into trust or not. Here’s how it usually works:

• If the policy isn’t in trust, the payout goes first into the account of the policyholder’s personal representative who’s dealing with the estate administration. This is usually the executor of the will. They then distribute the money according to the policyholder’s wishes.
• If the policy is in trust, the money is paid directly to the trustees and they then distribute the money following the trust rules. The beneficiary will usually receive the money much more quickly in this instance.

Do beneficiaries have to pay tax on a life insurance payout?

This depends. If you’ve written the life insurance policy into trust, there is no tax of any kind to pay on the payout.

If the policy hasn’t been put into trust, the payout becomes part of your estate (the value of everything you own, like your house, your car, your possessions and your money). If your estate (including your life insurance payout) is worth more than £325,000, there may be inheritance tax to pay at a rate of 40%. This would be paid for by the estate, not the beneficiaries. If the total value of your entire estate, including the life insurance policy payout, is less than £325,000, there won’t be any tax to pay.

Will the life insurance company contact the beneficiaries?

No. When someone dies, their representatives need to contact the insurer to start the claim. They’ll be expected to provide proof, like a death certificate, and the life insurance company will guide them through the process.

It’s usually a family member, executor or trustee who would get in touch with the provider and begin proceedings. Otherwise, the provider is unlikely to know that the person has died.

What if you’re not sure if you’re a beneficiary?

If someone close to you has died and you’re not sure if you’re a beneficiary, the first thing to do is look for the life insurance policy paperwork, if you’re a close relative. Another way to find out is to contact the insurer to check, or speak to the executor or trustees.

But it’s always best to keep loved ones in the know about this type of thing. If you have a life policy, don’t forget to tell people that you have one, where to find the information and who the beneficiary is. This makes it much easier if they need to claim.

How to find a life insurance policy

If a loved one has died and you’re not sure if they had a life insurance policy, or who it’s with, there are lots of ways to find out. You could search through their paperwork for policy documents, look through their bank statements for premium payments or ask their financial adviser or the executor of the will. Don’t be afraid to contact insurers directly to check. And there’s no time limit on claiming, so don’t worry if a long time has passed and you find out there’s a life insurance policy.

Can a beneficiary refuse the life insurance payout?

Yes. If a beneficiary doesn’t want the payout for any reason, they don’t have to accept it. The money is generally distributed by the trustees of the trust, or the administrator or executor of the estate. If other beneficiaries are named then the money would go to them instead. If it’s a sole beneficiary, the money would usually become part of the policyholder’s estate and be distributed as part of the probate process.

Can you contest a life insurance beneficiary?

It is technically possible to contest life insurance beneficiaries, but only through legal proceedings – the insurer themselves can’t make that decision. It’s generally only for instances such as suspected fraud or coercion, and it can be a complex and lengthy process.

Generally not. If a sole life insurance beneficiary dies, or there isn’t a named beneficiary, the payout will usually become part of the estate and be distributed in line with the will, if there is one. But a life insurance beneficiary who is named on a policy can’t typically be overridden by a will.

So if you want to change your life insurance beneficiary, just changing your will won’t be enough. Contact your insurance company and change the beneficiary on your policy as well, if your life insurance policy allows it.