Mums, do you understand the beneficiary rules in the UK?

*collaborative post*

Unfortunately, the past two years, because of the unforeseen COVID-19 pandemic, has forced many of us mums to consider what we may leave behind and how best to financially provision for our family. This often leads people to consider securing life insurance protection.

When taking out life insurance, you will usually be asked to name a beneficiary. Life insurance provides financial protection for your loved ones should you pass away, so you will want to choose beneficiaries that will benefit from your pay out the most if you were no longer around to provide. Choosing who to name as your life insurance beneficiary is a very personal choice and it is one that you should not be influenced into making. It can seem like a confusing task, especially if you are unaware of the rules involved.

You may still be wondering who the best person is to name as your beneficiary. Keep reading as this article will help to answer any further questions you may have…

What is a beneficiary?

A beneficiary is a named person (or persons) on a life insurance policy who will inherit the pay out upon the passing of the policyholder.

Who can be the beneficiary of a life insurance policy?

 You have the freedom to choose anyone you like to be a beneficiary of your life insurance. Many believe beneficiaries need to be your next of kin or a relative, but this is not true. Your beneficiary could be a:

  • Spouse
  • Civil partner
  • Relative
  • Child/children
  • Friend/s
  • Charity

The choice is ultimately up to you as the policyholder on who you would like to benefit from your life insurance.

Who should be the beneficiary of a life insurance policy?

Choosing who to name as a beneficiary can be a difficult decision, especially if you have multiple loved ones. To help with your decision, there are some key questions you can ask yourself:

  • How many dependants do you have?
  • Who is it that depends on you financially?
  • How old are your dependants/when will they be financially independent?
  • Do you have any shared financial commitments?
  • Who would benefit from the pay out the most?

If you have a partner or children, you may choose to name them as your beneficiaries to ensure they will not struggle financially after your passing.

Your pay out could then be used to cover:

  • Mortgage payments (so your family can remain in the family home)
  • Future family living costs (ensure your family can continue their current lifestyle)
    •              Childcare expenses
  • Your funeral costs (just a basic funeral now costs £4,184¹)
  • Any outstanding debts in your name

Or you may simply want to leave your life insurance pay out as an inheritance for family and/or friends to enjoy as they wish. Alternatively, you do not have to leave your pay out to a person. If you have a charity that is close to your heart, it is possible to have the charity named as the beneficiary. By doing this, the proceeds of your life insurance policy will be paid directly to your chosen charity.

Life insurance beneficiary rules spouse 

It is a common misconception that, if you are married, you have to name your spouse as a beneficiary. While it is common to do so to help cover share financial commitments, you are not obligated to name your spouse as a beneficiary on your policy. If you believe there are people who would benefit more from your pay out, you have the choice to name them instead. If you do decide to name your spouse as a beneficiary, there are not any specific rules, and the same standard rules will apply.

Can a child be a beneficiary?

Yes, children can be named as beneficiaries. However, children under the age of 18 will not directly receive the pay out proceeds. Typically, a guardian will be appointed to manage the money until the child turns 18. Alternatively, if you’ve written your life insurance in trust, the trustee will be responsible for the funds until the child is of age.

How many beneficiaries can I name?

It is possible to name multiple beneficiaries on your life insurance policy. You can name as many beneficiaries as you like. For example, you may want to name your spouse/partner, plus any children as beneficiaries so they can all benefit financially from your policy.

Do I have to name a beneficiary? 

Yes, in most cases you will be required to name at least one beneficiary who will benefit from your life insurance pay out, (otherwise what would be the point of this selfless investment?) If for some reason, you pass away without any beneficiaries your life insurance will be added to your estate. If you have left a will your estate will be divided as per you wishes. However, if you have not left a will this could cause problems when your estate is divided between loved ones. Naming life insurance beneficiaries is an easy and efficient way of ensuring your loved ones’ benefit from your selfless investment.

How do I name a beneficiary?


You will usually be asked at the point of application to name your chosen beneficiary or beneficiaries. It is important to provide as much detail as possible on this form to avoid any confusion after your passing. It is likely you will need to provide the following information:

  • Full name
  • Address
  • Contact information
  • Date of birth

Once your beneficiaries have been named, the form becomes a legal document that will be used by the insurer upon your passing. You are not required to inform your beneficiaries that you have chosen them, although knowing this information can make the claims process more straight forward.

How are life insurance beneficiaries divided?

If you have multiple beneficiaries, you may wonder how your pay out will be divided. Again, it is ultimately up to you how you wish your pay out to be divided between your loved ones. This could be divided as a specific sum of money or as a percentage of the overall pay out amount. For example, you may want 50% of your pay out to go to your spouse, 25% to a child and the remaining 25% to a close friend. This will need to be stated at the point of application, so the insurer or trustee knows how much to pay out to each beneficiary. If you have written your policy into trust, the trustee will be responsible for ensuring your pay out is distributed as per your wishes.

Can I change my beneficiary?

Some life insurance companies will allow you to change your beneficiary during the term of your policy. You will simply need to contact your insurer and, if they allow changes to be made, you will be sent a ‘change of beneficiary form’ to fill out.

If you have written your policy in trust, this could cause some complications depending on what type of trust the policy has been written in. If you have written your policy in ‘flexible’ or ‘discretionary’ trust, it is likely you will be able to make the necessary changes. However, if the policy has been written in ‘absolute’ trust, it’s unlikely you will be able to make changes. This is because an absolute trust is absolutely for the benefit of that specific beneficiary.

Keep reading to find out more about writing your policy in trust…

Writing your life insurance in trust (avoid 40% inheritance tax)

Writing your life insurance in trust detaches it from your estate and places a trustee in charge of the funds upon your passing. The trustee will then manage the pay out on your behalf and ensure it is distributed as per your wishes (like the executor of a Will). There are three key benefits to writing your policy in trust:

  1. Avoid/minimise 40% inheritance tax
  2. Avoid a lengthy probate process
  3. Have more control over your policy

This allows your loved ones to make the most of your selfless investment.

How much is inheritance tax (IHT)?

Inheritance tax is currently set at 40% and will need to be paid on any estate value over a set threshold. In the UK, the threshold stands at £325,000 for those who are single or divorced, or £650,00 for those who are married or widowed. Inheritance tax will be paid on any value over the threshold. For example, if the value of an estate is £600,000, 40% tax will be paid on the £275,000 that exceeds the £325,000 threshold. By writing your policy in trust, you detach it from your estate so it’s not subject to inheritance tax – allowing your beneficiaries to receive a full pay out.

UK life insurance broker Reassured Ltd specialise in securing life insurance for UK mums. They also offer a free trust service and can write your policy in trust, free of charge.

 What’s the difference between a trustee and a beneficiary?

The difference between a trustee and a beneficiary is that a trustee manages the funds from a life insurance policy, whereas the beneficiary inherits them. Upon the passing of the policyholder, the funds will go to the trustee for them to manage. They will be in charge of ensuring the money is distributed among the beneficiaries as per the wishes of the policyholder. The beneficiaries, on the other hand, will simply have the funds paid out to them.

Can a trustee also be a beneficiary?

Yes, it is possible for a trustee to also be a beneficiary. A trustee will be someone you trust and have a close relationship with; therefore, you may also want them to benefit financially from your life insurance policy.

How do beneficiaries claim life insurance?

Upon the passing of the policyholder, beneficiaries can contact the life insurance provider to let them know of the death. Most providers will require proof of the death in the form of a death certificate. It is likely the insurer will also need some basic information about the deceased, such as:

  • The policy number (if you know this)
  • Their full name
  • Their date of birth
  • Their home address

You may also be asked what your relationship with the deceased is and may have to provide some details about yourself, such as your name and contact information. The process may vary between providers, but you will be guided through what to do by the claim’s advisor. Once the insurer has everything they need, the claim will be assessed. Once the claim is deemed valid, the pay out will be made.

How is life insurance paid out?

A life insurance pay out will be paid directly to the beneficiary into a UK bank account. Unless the policy is written into trust, in which case the funds will be paid to the trustee who will distribute the money as per the wishes of the policyholder. The time it takes for the funds to be paid out can vary between providers.

Do life insurance companies contact beneficiaries?

 No, a life insurance company will not know of the death until they are notified of it, therefore they will not contact beneficiaries to start the claims process. To make the life insurance claims process more straight forward, you can inform your beneficiaries that they have been named so they know what to do when the time comes. Or, alternatively, you can keep the details of your policy to hand and notify your loved ones of where the details are, so when the time comes, they know where to look.

Who gets life insurance if beneficiary is deceased?

If a beneficiary has passed away and is unable to claim their funds, a contingent beneficiary will be entitled to the money. A contingent beneficiary is essentially a secondary beneficiary. If the primary beneficiary passes away before the policyholder, the contingent beneficiary will then take their place upon their passing. If you have named more than one beneficiary, you may choose to make one of the other beneficiaries the contingent beneficiary. If no contingent beneficiary has been named, then the funds will typically be paid into the estate of the deceased.

How do I find out if I am a beneficiary?

If a loved one has recently passed and you believe you may be a beneficiary, you can contact the insurers claims department. If you (or a family member) have access to the deceased’s documents, you may be able to find information regarding the policy. When taking out life insurance it is important that your loved ones know of the policy and know where to find the documents. This will help to speed up the claims process for your beneficiaries and prevent your pay out from going unclaimed.

If you have no way of finding out information about the policy, but you think you may be a beneficiary, there’s the Unclaimed Assets Register, where any unclaimed life insurance policies will be listed. Term-based policies should immediately be listed, but whole of life policies may not be added until the 100th birthday of the policyholder so these may not show up straight away. You will need to pay a £25 fee to use this service.

Sources:

[1] SunLife (2021), Cost of Dying Report, sunlife.co.uk/siteassets/documents/cost-of-dying/cost-of-dying-report-2021.pdf

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