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Talking about life insurance and beneficiary rules might not be at the top of everyone’s to do lists, however if you’ve reached a place in your life where thinking about the future means you’re looking into purchasing life insurance, you’ll also need to know about the associated beneficiary rules. Let’s look at some of the important things in this area.
Life insurance policies are usually taken out over a long period of time. Some policies can last up to 50 years or even a whole life, with many minimum ages for cover being eighteen years old. Over so many years relationships change, people come into lives and out of them, changing all the time. As such, you might wonder how one could expect to name a beneficiary and not be able to alter it. Well luckily there are two kinds of beneficiaries that can be named on a life insurance policy – of which one can be changed:
If the beneficiary is listed as a revocable beneficiary, then the process should be relatively straightforward. At the time the policyholder wishes to make a change to that beneficiary’s status, or perhaps add another beneficiary, they will need to get in touch with the life insurance policy’s provider and request a “change of beneficiary form”. Usually this can be done online, over email or the telephone, and should not take longer than twenty-four hours to process and update the policy.
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After the policyholder has passed away, a beneficiary will need to file a death claim. They will have to obtain a copy of the policyholder’s death certificate, which they would subsequently pass on (plus any relevant policy documentation) to the relevant insurance provider to process payment of the claim to that beneficiary.
Before any money can be paid out to beneficiaries, they will have to sign a benefits claim form, confirming they are the so-named beneficiary and are accepting the money.
If there is only one beneficiary then that individual will receive 100% of the life insurance’s payout. If there is more than one beneficiary, the funds will be allocated according to the policyholder’s instruction.
If the beneficiary is a minor under the age of eighteen, the payout will be placed under the responsibility of a custodian who will be guardian to the money (and how it’s distributed to the minor), until the child turns eighteen.
Payouts made to a beneficiary from a life insurance policy are not subject to capital gains tax or personal income tax. This means that the payouts are usually tax free to the beneficiary – as long as they are under a certain amount. Life insurance payouts are however subject to inheritance tax, and the current UK tax laws state the inheritance tax threshold to be £325,000. If the payout, plus the policyholder’s other inheritable assets (beyond the life insurance policy), is less than that, then no tax is owed. If over £325,000 however, inheritance tax will apply. If you are worried about applicable inheritance tax implications on a life insurance policy, then you might consider putting the payout into a trust where it will not be subject to that tax.
If there is no beneficiary (for example they have passed away), then the life insurance payout will go into the policyholder’s estate for distribution to the beneficiaries there, as per their will. If there is no will, the assets will be distributed in accordance with current inheritance laws, which usually means going to the next of kin, such as a spouse, children, or further afield to distant relatives.
A primary beneficiary is a person named by the policyholder who is first to receive any subsequent payout (there can be multiple primary beneficiaries with the share of payout they receive determined by the policyholder).
If contingent beneficiaries are named on the policy, they are essentially “next in line”, should the primary beneficiary not be in a position to claim their payout. If the primary beneficiary is able to claim their payout, any contingent beneficiaries on the policy will not receive anything.
If an individual is given power of attorney over an individual, this can affect the proposed beneficiaries of a life insurance policy. It comes down to what responsibilities the person who has been given power of attorney has: they might only have a limited role, for example purely for medical choices such as Do Not Resuscitate Orders. If they have been given additional powers over their principal’s financial matters, then there is the possibility that they have the power to change the revocable beneficiaries of a policyholder’s life insurance.
If an irrevocable beneficiary is on a life insurance policy, this cannot be changed by a person given power of attorney.
Own-life Own benefit is a form of life insurance that names no beneficiaries. If a policyholder has taken out this kind of policy, there will be no specific beneficiaries tied to the policy, and the benefit instead will be folded into the policyholder’s estate. Thereafter it would be distributed as per the will, or else according to inheritance law.