Insurance plays an important role in financial planning, as it offers a way of financially providing for your family in the event of your death. However, the proceeds of your life insurance may not always end up in the hands of whom you intend. Read on to find out more about how you can protect the proceeds of your life insurance and ensure that it goes to the right people.
As the owner of a life insurance policy, you are entitled to all the proceeds from the life insurance itself. Therefore you may wish for the person you intend to receive the insurance proceeds to be the owner of your life insurance policy. For example, a husband may own his wife’s policy or vice versa.
However, there is the implication that only the policy owner may make changes to the life insurance policy. Therefore as a precaution, many will wish to remain as the owner of their own policy, rather than to delegate the power to somebody else.
If you choose to be the sole owner of your own life insurance policy, in the event of your death, the proceeds of your life insurance will be paid to your estate. Your executor will then distribute your estate in accordance with your Will. Having the proceeds channelled towards your estate may not be the best option, as discussed further below, and can be avoided by nominating a beneficiary.
Nominating a beneficiary
When taking out a life insurance policy, you are able to nominate a beneficiary. A beneficiary is a person who you wish to receive proceeds of your life insurance. You can generally nominate up to five beneficiaries to share the proceeds, and in the proportion in a percentage of your specification.
The most commonly nominated beneficiaries are a spouse or children, but it is at your discretion to name whomever you wish. The only eligibility criteria is that a beneficiary must be over 18 years of age. If your children are under the age of 18, this criteria can be overcome by stating in your Will that the proceeds of the life insurance are to given to your dependent children. Therefore, in the event that any other beneficiaries (such are your spouse) pass away, your children will be the recipients of the proceeds.
This nomination is binding, and cannot be ignored or overturned by the life insurance company, and therefore creates a legal obligation to pay all nominated beneficiaries. This ensures that your the proceeds are paid to the right people.
When the proceeds of your life insurance go to your estate
In circumstances where you are the sole policy holder, and you have not nominated any beneficiaries, the proceeds of your life insurance will be paid to your estate upon the event of your death. Your estate will then be distributed by your executor in accordance with the terms of your Will. However this process may not provide the best protection for the proceeds of your life insurance, as there are problems such as:
- Delays in receiving any proceeds
The distribution of an estate can be a timely process, and can lead to delays in your family members receiving any proceeds. The loss of a loved one is a stressful time and this can cause place a further financial stress upon your family, particularly if they do not earn an income.
- Payment of debt before distribution of proceeds
If, at the time of your death, you owed any debt, there is the risk that the proceeds of your life insurance may firstly go towards paying off your debts, and only then will the remaining funds be distributed to your family. This also includes new debts incurred such as funeral and testamentary expenses (costs of administering a Will).
If the Will of the deceased person contains the specific direction to make the proceeds available to creditors, the debts incurred prior to the death must be paid.
- Contesting of the Will
If any relative or partner feels as though they have not been aquately provided for by your Will, they may contest the will. This may result in them taking a larger portion of the insurance proceeds that you have intended for.
- No Will, or an invalid Will
If you do not have a Will, or your Will is either unclear or invalid, your estate will be subject to State Intestacy laws (which rules that only the next of kin will receive the proceeds), which can lead to even further delay.
Your personal circumstances may change over time, and an event such as a separation, divorce or loss of spouse may affect who you intend to receive the proceeds of your life insurance. In light of such events, you should promptly update your beneficiary nominations, or your Will, to ensure the proceeds of your life insurance go towards your desired recipients.