Life insurance beneficiary explained

A beneficiary is a named person (or group of people) who receives money or benefits from someone else. When it comes to life insurance, beneficiaries may be entitled to a lump-sum payout if the policyholder passes away while covered by the policy.

Naming a life insurance beneficiary helps to ensure the payout from your life cover goes to the people it’s been taken out to protect.

If you want to name a beneficiary when you take out a life insurance policy, you will have to use a trust to choose the beneficiary (if you don't use a trust, a succesful claim would wither be paid to the estate on a single life policy, or the other person named on the life insurance on a joint policy). While most people nominate their relatives or spouse, a life insurance beneficiary could be from a broad range of people, such as:

• A spouse
• Parents
• Siblings
• Friends
• Children or stepchildren
• Close or distant relatives
• A common law partner
• Charitable organisations

Life insurance beneficiaries can be named within a will or placed in trust. These are both useful for transferring ownership of assets and money, including the value of your life insurance policy.

What is a will?

A will is a legal document through which you set out how your estate (money, property and possessions) is to be handled after your death. Your will only takes effect after you pass away, in which event your beneficiaries will inherit your estate.

If you die without having made a will, your estate will be shared according to strict inheritance laws, known as the rules of intestacy. Under these rules, the law will decide who inherits what, rather than the inheritance being based on your personal wishes.

What is a trust?

A trust is a legal arrangement where you (the donor/settler) give your policy to a trusted person (trustee) to manage. The trustee will then arrange to pay your beneficiaries at a certain point in time, which can be on a specific date or after your death.

When you put your life insurance in trust, there are different types to choose from, including:

• Absolute trusts – allow quick payouts without legal delays, but the named beneficiaries can’t be changed in the future.
• Discretionary trusts – grant your trustee a high level of discretion and flexibility over which beneficiaries to pay after your death. 
• Flexible trusts – have a default beneficiary and a discretionary beneficiary, each of whom hold different entitlements to income from the trust.

Yes, children can be life insurance beneficiaries. It’s common for people to name their children  as a beneficiary to help with childcare or education costs.

Any beneficiary who’s classed as a minor can’t access the money directly until they’re 18 years old. If you pass away before then, a guardian or a trustee (if a trust is used) will need to be appointed to manage the money until your child reaches adulthood.

There are situations where you might want to change your beneficiary – for example, if the relationship changes or the beneficiary inherits money from elsewhere. This can be done by changing the will, but it will also depend on the type of trust you’ve chosen.

For discretionary trusts, your trustee can change the life insurance beneficiaries on your behalf. If it’s an absolute trust, you can’t add or change beneficiaries. Sometimes, changing the beneficiary may require a change to the life insurance policy document. 

If you’re a beneficiary, the policyholder will normally let you know you’ve been named in their will or trust. But if they have not done so and they die, the executor of the will or trustee may contact you to say you’re named as a beneficiary.

If you suspect you may be a beneficiary, contacting a trustee or executor of the will can be a good place to start. Or, if you’re a close relative or have permission, you could try locating the policy documents yourself.

Do life insurance companies contact beneficiaries?

No, life insurance companies don’t contact beneficiaries. In the first instance, a family member, the executor, or trustees will inform the life insurance company that the policyholder has died. The executor or trustee would then manage the payout to the life insurance beneficiaries. 

When a valid life insurance claim is made, the payout is paid directly to the legal policy owner or representative – often the executor of the will. They are then responsible for distributing the funds to the life insurance beneficiaries. If there is no will, the lump sum is paid to administrators of the deceased's estate.

Alternatively, if the life insurance policy is placed in trust, the trustees receive the payout and distribute it to the beneficiaries.

It depends on the type of tax, but generally not. The lump sum from a life insurance policy isn’t liable for Income Tax or Capital Gains Tax. But if the policy forms part of the policyholder’s estate, and the estate exceeds a total value of £325,000, then it could be subject to Inheritance Tax.

If there are multiple life insurance beneficiaries, the policyholder will have likely stated in their will what percentage of the lump sum each beneficiary should receive. Once a valid claim is made, the executor will action the payout. 

If there is no will, then rules of intestacy apply. This could mean multiple surviving relatives share the life insurance payout. For policies placed in trust, the funds would be paid out to the trustee, who would distribute to the beneficiaries accordingly.

The time it takes for beneficiaries to receive a life insurance payout depends on whether there’s a trust or will.

Life insurance policies written under trust normally have a quicker payout. This is because the money isn’t part of your estate and won’t need to go through probate and other legal processes.

Without a trust, your personal representatives must successfully apply for probate to secure the legal right to manage your estate after your death. This process can take a while, and if you die without leaving a will, it can take even longer.