Who should your life insurance beneficiary be?

What is a life insurance beneficiary?

A life insurance beneficiary is someone you designate to receive the proceeds of a payout from your life insurance if you die. You can name one person or several. You can also name organisations and charities, or, if the people you would like to benefit are under the age of 18 you can name them as beneficiaries with the qualification that any money paid out is held in trust for them until they become adults.

If you don’t name at least one beneficiary then, if you die, the payout will become part of your estate, making those who inherit potentially liable to pay inheritance tax.

The legal rules on beneficiaries

Choosing who will receive the payout from your life insurance policy is an important decision, as UK life insurance beneficiary rules mean that the individuals you name have a legal right to the funds, as outlined in your policy.

You can name someone as either a revocable or irrevocable beneficiary. If you give them revocable status you can remove them at will by filling in a form provided by the insurer. If you make them irrevocable you can only remove them by getting their written consent in addition to completing the form.

If you’re thinking about adding beneficiaries to life insurance this is a straightforward process. You simply have to complete a beneficiary designation form provided by your insurer. It may also be possible to do this online or by phone.

Who can be a beneficiary of life insurance?

There are few restrictions on who can be named as a beneficiary. In most cases, people nominate their spouse or partner and their children, but you’re free to choose other family members, friends or even your favourite charity.

 How many life insurance beneficiaries can I have?

You can name as many beneficiaries as you like, but to avoid any confusion later you should make it clear in your policy how the money will be shared. This is usually done by allocating a percentage of the payout to each beneficiary. If you miss this step your insurer should alert you to your mistake – without clear instructions there could be disputes between the beneficiaries which might even lead to legal action.

How to choose a beneficiary for life insurance

This is an important decision so you should take your time and don’t let yourself be pressured by anyone. If you’re wondering who to put as a life insurance beneficiary, there are several important questions you could ask yourself.

• Who among your family and friends would benefit the most? 
• Does anyone have a specific need for extra financial help?
• Are there outstanding debts to cover like a mortgage or tuition fees?
•  How many beneficiaries do you want to name? 
• Do you want a charity or charities to share in the payout, or even receive it all? 
• Could it be detrimental to a beneficiary if they were to receive a large lump sum? 
• An example would be someone whose benefits might be adversely affected.

With these questions in mind, let’s look at the types of beneficiaries that most people choose.

Family and friends

Immediate family and close friends are the obvious beneficiaries for most people. 

Contingent beneficiaries 

If you designate an elderly relative, remember that they may die before you and if that happens you should remove them otherwise their share will simply be divided between the remaining beneficiaries. To avoid this you can designate contingent beneficiaries, who will be next in line to receive a payout if one of the primary beneficiaries predeceases you.

Children as beneficiaries

A life insurance payout can be very useful to your children by helping with the cost of getting established in adult life. But can a minor be beneficiary for life insurance? Not directly. If your children are minors when you take out your policy you should set up a trust to look after the funds as they can’t legally receive them until they are 18.

Charities as beneficiaries

If there’s a charity that’s particularly close to your heart then you can make it a beneficiary in exactly the same way as you would an individual. If you wish, they can be a primary or contingent beneficiary. 

Trustees as beneficiaries

Putting your life insurance in trust is a good way of keeping control over how the payout is distributed and protecting it from inheritance tax. Trusts need to be run by responsible, reliable trustees so it’s quite likely you’ll want to appoint someone you know well. If you choose a close friend or family member for the role, this doesn’t exclude them as a beneficiary. It’s perfectly legal for trustees of a life insurance policy to be beneficiaries as well.

Being your own beneficiary

It might seem counterintuitive to think of yourself as a potential beneficiary of your own life insurance, but if your policy includes terminal or critical illness benefit, this is the effect. Terminal illness benefit can payout while you’re still alive, if a doctor confirms that you are suffering from an illness that will end your life within a specified period, which is usually between 12 and 18 months. It doesn’t technically make you a beneficiary, but the result is the same.

How is life insurance paid out to beneficiaries?

Once you pass, your life insurance policy will pay out as specified in your policy. However, it’s not automatic and the insurer will have no knowledge of your death until your beneficiaries make a claim. The insurer will need the death certificate as proof and the beneficiaries will need to complete a claim form. Bear in mind that insurers won’t seek out the beneficiaries in order to pay them – it’s the responsibility of the beneficiaries to make themselves known to the insurer.

Your beneficiary doesn’t have to be a UK resident, but their ability to receive payment may be affected by the policy terms, local tax issues and whether they hold a UK bank account.

Do beneficiaries pay tax?

There’s no income tax or capital gains tax to be paid on life insurance payouts. If the proceeds of your policy become part of your estate when you die, they will be subject to 40% inheritance tax if your total estate exceeds the tax-free threshold of £325,000. As we’ve already mentioned, putting your life insurance policy in trust keeps it outside your estate and avoids any tax liability.

Life insurance and wills: do you need both?

A will and a life insurance policy have distinct functions so whatever your life insurance arrangements, you should also prepare a will. For one thing, someone can be a beneficiary of your life insurance policy while not being named in your will. Your will performs a broader function, dealing with the distribution of your entire estate. Your life insurance policy can be kept separate from your estate with the payout being distributed according to the terms of your policy and independently of the terms of your will.