What Is a Life Insurance Beneficiary?

When you apply for a Life Insurance policy, you’ll be asked to choose a beneficiary – i.e. a person who will receive benefits if a claim is made. Although this might at first seem like a simple task, there are several things to consider before making a choice.

In this article, we’ll explain how the term ‘Life Insurance beneficiary’ is used by insurance companies and share tips for making the right choice for you and your family. We’ll also provide information about whether beneficiaries pay tax on life insurance and outline the steps beneficiaries need to take when making a claim.

Please note that this article discusses life insurance outside super. There are specific rules about payment of the proceeds of life insurance within super.

What is a beneficiary?

The general definition of ‘beneficiary’ is a person who receives benefits (such as money) from a benefactor. The same concept carries over to the word ‘beneficiary’ in insurance, meaning that you nominate a person to be the recipient of your Life Insurance payout.

Put simply, a Life Insurance beneficiary is somebody who receives money from your policy once a claim is made. You name this person as part of the application process.

What’s the difference between a binding and non-binding beneficiary?

When you apply for Life Insurance, you have the choice to nominate either a ‘binding’ or a ‘non-binding’ beneficiary. The key difference is as follows:

• Binding: The binding beneficiary of Life Insurance will be explicitly named in the policy as the person who is to receive the payout. They are the legally binding beneficiary, which means that the insurer is obligated to pay the proceeds directly to them – bypassing the estate or any conflicting claims.
• Non-binding: The non-binding beneficiary will be nominated by the policyholder to receive the payout, but the insurer is not legally obligated to honour this nomination. The final decision on the distribution of the payout may be influenced by other factors, such as the policyholder’s will, or legal claims.

Who can become a beneficiary?

A Life Insurance beneficiary doesn’t necessarily have to be a person. In fact, you can name any of the following:

• Your spouse
• Your children
• Adopted or step-children
• A friend
• A business partner
• A trust
• A charity
• Your estate

When naming an individual, it’s important to understand the regulations surrounding age. Typically, you will nominate somebody who’s aged 18 or over. This ensures that the beneficiary receives the benefit as quickly as possible.

This doesn’t mean that you can’t name somebody who’s under 18 as your beneficiary. However, this person can’t claim the benefit directly until they’re of age. Should you pass away before the beneficiary turns 18, the money will go to a legal guardian or trustee. And if you haven’t appointed one for your beneficiary, the courts may do it on your behalf. This often comes at a cost, which can eat into the lump sum that your policy grants.

Can you have multiple Life Insurance beneficiaries?

Many people assume that they can only name one beneficiary to their Life Insurance policy. But this isn’t the case.

With most life policies, including a NobleOak Life Insurance policy, you can nominate a variety of beneficiaries but you need to ensure the percentage allocated to each beneficiary adds up to a total of 100%. So, you might (for example) have five beneficiaries, each allocated 20% of the total benefit.

If you hold a NobleOak Life Insurance policy, you can add or remove beneficiaries from existing NobleOak Life Insurance policies, using our Nomination of Beneficiary form. This will need to be signed, dated, and sent to us by either:

• Email: [email protected]
• Fax: 02 9299 7852
• Post: GPO BOX 4793 Sydney NSW 2001

We would require the full name and date of birth of the beneficiary, and their relationship to you. In the case of you having more than one beneficiary, the designated benefits for each must add up to 100% of the total benefit.

What is a nominated beneficiary entitled to?

In the case of Life Insurance, a nominated beneficiary is entitled to the insured amount (or a share, if more than one nominated beneficiary) on the passing of the policyholder. Upon the policyholder’s passing, the insurer pays the death benefit directly to the nominated beneficiaries, bypassing the deceased’s estate and avoiding potential delays caused by probate. This ensures that the beneficiaries receive the financial support intended for them in a timely manner.

Do beneficiaries pay tax on Life Insurance in Australia?

In Australia, Life Insurance payouts to beneficiaries are generally not subject to income tax if the benefit is paid as a lump sum. This applies when the payout is made to financial dependents, such as a spouse, partner, or children, as they are considered the intended recipients under Australian tax law.

However, if a payout is made to someone who is not financially dependent on you, it may be subject to tax – depending on the type of payout. You will need to check your policy to see who qualifies as a financial dependant.

You can learn more in our article Is Life Insurance Tax Deductible? The Australian Taxation Office’s guide for beneficiaries of a deceased estate is another useful resource.

How do you choose a beneficiary?

In this section, we’ll guide you through the process of choosing a Life Insurance beneficiary. We’ll also explain how to change your beneficiaries if your circumstances change.

Think about how you want loved ones to benefit

You should take some time to think about how you want your loved ones to use the benefit. Figure that out first and then make your choices, depending on who will best serve that purpose.

If you want the death benefit to replace lost income for your family if you pass away, it’s best to name your spouse (or partner) as your primary beneficiary.

Alternatively, if you want to ensure your children have all of the money they need for their education, a trust may be the better option.

Maybe you have a business that can provide an income for your family. You just need to ensure the business keeps operating when you’re gone. In this scenario, it may be best to name a business partner as your beneficiary.

Avoid nominating minor children when possible

Of course, many policyholders want to provide for their children’s future with their policy. And that’s understandable. However, choosing a beneficiary who is under the age of 18 creates the possibility for complications.

The solution is to not name a child directly. Instead, do one of the following:

• Create a trust for the money that you can nominate, OR;
• Assign a custodian or legal guardian for your child. Consider if you want the courts to handle this on your behalf, as this will add to the cost. Furthermore, you must trust the person that you choose implicitly. They will have some measure of control over how the money gets used after your passing.

Update your policy if your circumstances change

• If you have an existing Life Insurance policy, and your personal circumstances change, it’s important to review your policy and make updates if necessary.For example, let’s say that you get married a few years after taking out your policy. You hadn’t met your partner before getting the policy, which means they’re not named on it. You’ll likely want to make your partner your new primary beneficiary.Fortunately, changing your beneficiaries is a fairly simple process. Please visit our guide for more details: Updating beneficiary details: How to and why?

Consider the potential beneficiary’s own circumstances

The circumstances of a potential beneficiary may play a part in your decision.

For example, let’s say you intend to name somebody who has a disability and is currently claiming benefits related to that disability (due to their lowered income level). If this person receives your Life Insurance benefit, the money may take them above any income threshold for their disability benefits. This could mean they lose long-term income for a short-term lump sum.

This doesn’t necessarily mean that you can’t name somebody in such a situation as a beneficiary. However, you’ll need to put a lot of thought into their future. If the policy’s lump sum is lower than the amount they’ll receive from their benefits, you may decide to choose somebody else.

The point here is to consider how the lump sum will affect the recipient. As strange as it may sound, not everybody will benefit from a single large payment.

Three reasons for choosing a beneficiary

When you nominate a beneficiary in your Life Insurance policy, you’ll have certainty about where your money and assets will go after you pass away. Below, we’ll explore three of the most crucial reasons why making a considered beneficiary choice is important.

1) Control over how your wealth is distributed

Imagine that you have a detailed plan for your family’s future. For example, you wanted to leave a portion of the money for your child to start a business. Or, maybe you wanted to pay off a big chunk of your mortgage.

But if you’re suddenly gone, your family may not know about these plans. Additionally, it’s hard to manage money in times of emotional distress. There’s a chance they will end up using the money for reasons other than what you intended it for.

When you nominate a beneficiary who understands how you want your wealth to be distributed, this will help to make sure that your family’s future unfolds in the way you wanted it to.

2) You can help secure the future of your dependants

When you think of the worst outcome, you rarely think about yourself. Instead, you worry about the future of your children. Who will provide for them? Who will secure their education?

Nominating the right Life Insurance beneficiary can help. The death benefit can be used to cover their immediate needs such as housing and daily living expenses, and it can also serve as a financial cushion for their future – funding higher education, extracurricular activities, or even a trust that safeguards the money until they reach a certain age.

3) Avoiding family conflict

Nominating a Life Insurance beneficiary can help avoid family conflict after your death by providing clear, legally binding instructions about who should receive the death benefit. This clarity minimises ambiguity and reduces the likelihood of disputes among family members over the distribution of funds. Since the payout goes directly to the named beneficiaries, it bypasses the estate and probate process, which can often be a source of contention.

The five steps beneficiaries need to take when making a claim

Here, we’ve put together a step-by-step guide for beneficiaries when they have to make a claim after a loved one has passed away.

Step 1) Gather all relevant policy documents

The first step is to gather and review all relevant original Life Insurance policy documents – if your policy is with NobleOak, please contact us if you need help with this. You can also find useful information in our guide to making an insurance claim.

Step 2) Get a copy of the deceased’s death certificate

It’s important for the beneficiary to obtain a copy of the death certificate (this could take up to a week).

To make the process faster, we recommend getting a certified copy of the death certificate. An easy way to do this is to get the funeral director to certify a copy of the certificate. That way, you won’t have to go to the regular document certification sources, and you’ll be able to lodge the claim right away.

If you need to get a payout advancement to cover the cost of the funeral, you can seek this when you file the claim. Of course, this is only possible if it’s among the policy features.

Step 3) Contact the insurer as quickly as possible

Once you have all the required documents at hand, it’s best to initiate the claim soon as possible. If the policy is from NobleOak, you can contact us online or call our claims support team on 1300 551 044. After they’re informed, the insurer will send over the claim forms, probably with a checklist of required documents. Alternatively, the claim form itself will indicate what documents are needed.

Step 4) Complete the claim form

When you’re filling out the claim form, all the required fields and boxes will need to be completed. You will also need to include all the supporting documents when you submit the claim form. Upon receipt, the insurer will formally assess the claim.

Step 5) Be ready to wait for the claim to process

Ideally, the insurer will have everything they need to approve the claim. In some circumstances they might ask you to provide more information, such as medical records.

Having arrived at a decision, a representative from the insurer will get in touch to inform you.

Even if the claim is rejected, the beneficiary can still appeal the decision. Possible reasons for a claim rejection might include false information and suspicion of suicide. For the latter, most Life Insurance policies will have the clause that the sum insured will not be paid if suicide is committed within 13 months of the policy going into effect.

What happens if a beneficiary is not nominated?

If you don’t have a beneficiary listed on your Life Insurance policy, the death benefit will typically be paid to your estate. This means the proceeds become part of your overall assets and are distributed according to your will, or if you don’t have a will, in line with your state’s intestacy laws.

This process can be lengthy, as the payout may need to go through probate. Probate can delay access to the money and may incur additional legal fees, which can diminish the amount your loved ones receive.

To avoid these complications, it’s advisable to nominate one or more beneficiaries when you take out the policy or update your policy to include them if they’re missing. If you’re unsure who to nominate or your circumstances change, consulting with a financial adviser or estate planner can help you make a decision.

Award-winning Life Insurance

With a legacy of simplicity and quality, NobleOak is a trusted provider for individuals and families seeking reliable insurance cover. We’re dedicated to providing the best possible customer service, offering guidance about Life Insurance as well as compassionate assistance during times of loss.

To help safeguard your family’s financial future, you can use our insurance calculator – this will give you an idea of how much Life Insurance might cost. You can also start a quote online or get in touch by calling 1300 041 494.

Any financial product advice is general in nature only and does not take into account your individual circumstances, objectives, financial situation, or needs. Before acting on it, please consider the appropriateness of the information, having regard to those factors. Any third party websites or tools referred to are subject to their own terms and conditions and NobleOak Life Limited makes no representation or warranty as to any information on those websites. Persons deciding whether to acquire or continue to hold life insurance issued by NobleOak Life Limited should consider the relevant Product Disclosure Statement and Target Market Determination for the product. NobleOak Life Limited ABN 85 087 648 708 AFSL 247302.