Who gets life insurance payouts when I die?
The most common reason for anyone buying life insurance is to pay out to their family and support their children if they die.
What happens with my life insurance when I die?
Ideally, you should have a conversation with your partner or your family about what you want to happen with your life insurance when you die. You can use a Trust or a Will to help others to understand and follow your wishes when you have passed.
Clearly there are a number of circumstances where this either might not be possible or the simple fact that things change (e.g. marriage, divorce, separation, adoption etc.). If your circumstances change, it is a good idea to review your policy to make sure you are still happy with the level of cover.
Most good life insurance advisors will offer to put your policy in to Trust which can be done at any point during the term of your plan. This is the easiest, quickest and cheapest way to make sure that your family gets their payment without any issues and more quickly.
The simple answer is that your life insurance policy will payout to your loved ones as long as they submit a claim.
Life insurance companies are legally obliged to pay out on your policy as long as it is valid with no exclusions (e.g. suicide within the first 12 months). Your families claim will be registered with the relevant claims team and they will then request several bits of information.
Life insurance claims information requirements are:
- A valid death certificate
- Cause of death for the policyholder
- Date and time of death
- Any Trust or Wills that are registered
- Relationship to the deceased
- Details of the solicitor instructed to manage the estate
Placing your life insurance policy in to Trust can seriously simplify this process and make it much more comfortable for your loved ones.
Note: there are very few life insurance policies that can be placed in to trust, and most are easy to put in to trust. The main life insurance policies that people buy are term life insurance, over 50s life insurance and whole of life insurance that can all be put in to Trust.
Writing life insurance in to Trust
A trust is a legal document that can be assigned to a life insurance policy to help to avoid probate and reduce tax liability. Most life insurance specialists will provide a free trust service whereby they will complete the paperwork for you.
The trust process is actually very quick as long as you know what you’re doing or you’ve got help from an expert. Your life insurance specialist should complete most of the documentation for you and gather the relevant information.
Information required for most life insurance trusts are:
- Trustee details (e.g. name, address, DoB etc.)
- Policyholder details
- Plan details (policy number)
You might want to speak to a qualified solicitor if you feel that you need to take proper legal advice about this process.
How long do life insurance payouts take normally?
Life insurance claims can vary significantly depending on how complicated they are and whether a trust is in place.
The majority of life insurance claims will be paid out within 30 days of the claim being received by the claims team. Once you have submitted your claim form to the insurance provider with all of the information that they need, insurers are usually fairly quick to process claims.
If your policy is in trust and you notify your insurer about this then your claim can be processed in a matter of days.
There are some things that can delay a claim being paid, such as:
- Insufficient information
- Outstanding evidence
- Group life insurance claims
- High value claims
- Multiple beneficiaries
- No trust or will in place
- Contested claims
- Estate or probate problems
Some life insurance claims have been known to take years to payout where there are serious complications or questions about the claim.
What happens if I don’t have a trust or will in place?
There are several significant reasons why you should have a trust or will in place with your life insurance policy.
The implications of not having a trust or will in place can be distressing for your loved ones and potentially costly. Here are some of the main issues that your family can come up against if you don’t have a trust or will.
- Inheritance Tax liability can be extremely expensive (if applicable)
- Probate issues can take years to resolve if not clear
- Your wishes may not be followed as you would want
- Potential claim on benefit from unwanted parties
Can you change who your life insurance pays out to?
In most instances you will be able to change the beneficiaries on your life insurance policy, where the beneficiary can be changed.
There are two main types of assigning beneficiaries to a life insurance policy which are ‘revocable’ and ‘irrevocable’. As the name suggests, the main type of assignment that people use is revocable, which can be altered upon request.
If your policy is assigned to a beneficiary or group of beneficiaries then this can usually be changed upon your request to your insurer. The main reasons why this might not be possible are:
- If you are considered to be mentally incapable of making this decision (e.g. dementia or Alzheimer’s Disease)
- Where the policyholder has already passed away
If your policy has an Absolute Trust for example, this might not be possible to alter and your beneficiaries will be fixed. This is something that might be used for certain circumstances or for some business protection policies.
Is my life insurance payout taxable?
There are some instances where your life insurance benefit could be taxed before paid to your family (beneficiaries).
The most relevant tax for life insurance payouts is Inheritance Tax (IHT) which is chargeable at the relevant rates at the time. Your whole estate will be accumulated and any amount above the IHT threshold, including your life insurance payout.
Inheritance tax rates can be found on the HMRC website or by speaking to a qualified tax advisor.
You can help your family to either reduce their inheritance tax liability or even avoid paying IHT on your life insurance payout. The best way to do this is to make sure that your policy is written in trust.
Who should I speak to about life insurance payouts?
You should speak to a life insurance specialist about how payouts work if you have any specific questions.
If you want to discuss a claim or a potential claim then you should contact your life insurance provider. You should be able to get the claims team contact details from your documentation or from their website.