Life insurance is designed to financially protect a person’s life. If the person dies as a result of an eligible event stated by the policy, the listed beneficiaries receive a life insurance death benefit.
Applying for life insurance
An insurer will usually ask an applicant a range of questions about their health, and can be required to undergo a medical examination before a policy will be granted. The person will most likely be required to prove they have “insurable interest” on someone, meaning someone will suffer a financial loss if the person dies. A policy can be owned by different entities, such as an individual, a couple, a super fund or an employer. The policy states the amount to be paid as a life insurance death benefit.
Deaths for which life insurance death benefits are payable include deaths from natural causes and accidents, but may not include suicide or deaths that result from risky activities.
Beneficiaries
When a life insurance policy is taken out, the person can nominate a beneficiary or beneficiaries to receive the life insurance death benefit when the person dies. Typically, spouses and children are nominated. To receive a payment directly, the beneficiary must be aged over 18. If they are aged under 18, the benefit is paid to a nominated trustee or legal guardian to be held for the beneficiary until they turn 18. The life insurance death benefit is split as a percentage share.
If a nomination is not made, a trustee may use their discretion to decide who should receive the payment, regardless of what is indicated in a will, or to make a payment to the deceased’s legal personal representative [executor of the deceased estate] to distribute the payment in accordance with the deceased’s will.
Binding nomination
When there is a binding nomination, the trustee must pay the life insurance death benefit to the nominated beneficiary or beneficiaries. Some nominations must be renewed after 3 years, while others can be indefinite. Binding nominations allow the benefit to be paid faster and with fewer hassles than if the benefit is directed to an estate or the payment of it is left to a trustee’s discretion. Also, the benefit is more likely to pass to an intended beneficiary.
Non-binding nomination
A non-binding nomination means a trustee will consider the nomination as an indication but has full discretion to pay the benefit to who they believe is the most appropriate beneficiary. This could be to one or more individuals or to an estate. Alternatively, the trustee can make a payment to the deceased’s legal personal representative [executor of the deceased estate] to distribute the payment in accordance with the deceased’s will.
If a dispute arises over who is to be a beneficiary, it may need to be resolved through the Australian Financial Complaints Authority or through the courts. If the life insurance death benefit is paid to an estate and the deceased’s will does not provide for it, or the deceased died without a will, the benefit may be distributed according to the intestacy laws of the applicable state.
Life insurance through superannuation
Most Australians hold life insurance through their superannuation fund. When life insurance is held through a superannuation fund, the life insurance death benefit is paid as part of a superannuation death benefit. The superannuation death benefit can generally be paid only to someone who is a superannuation dependant or legal personal representative.
To receive the superannuation death benefit, a nominated beneficiary must fit the definition of “superannuation dependant”, which includes a spouse or de factor partner, child of any age, or someone who was financially dependent on, or in an “interdependency relationship” with, the person at the time of their death. An interdependency relationship exists between two people if they have close personal relationship, live together and one or each relies on the other for financial support, domestic support, or personal care.
Terminal illness
A life insurance policy allows a person to make a claim if they have been diagnosed with a terminal illness. The claim allows for the early release of the life insurance death benefit. Two medical practitioners must certify the policy holder is unlikely to survive more than 24 months.
Taxation
A beneficiary will usually receive the life insurance death benefit as a lump sum, but can choose to receive it as an income stream instead. Nominated beneficiaries do not usually pay tax on the life insurance death benefit received if the policy is owned by an individual and is held outside of superannuation fund. Tax must be paid if the policy is held inside a superannuation fund, and may need to be paid if the benefit is paid to help cover a revenue loss caused by the insured person’s death.
Other types of life insurance
Several other types of life insurance may be offered to protect a person financially if certain events occur.
TPD insurance
Total and permanent disability [TPD] insurance pays a lump sum to help pay rehabilitation and living expenses when a person suffers a permanent injury or illness. The policy can cover a person for their own occupation or any occupation. It is designed to help cover costs such as paying a mortgage, medical bills and retirement.
Trauma insurance
This insurance is designed to help a person financially during a period of critical illness or serious injury. It pays a lump sum to cover medical and rehabilitation costs for conditions such as cancer and stroke.
Income protection insurance
This insurance is designed to pay some of a person’s income when they cannot work due to illness or injury.
For advice or representation in any legal matter, please contact Armstrong Legal.