Choosing a beneficiary is usually a simple task, but there are a few things you should keep in mind when you decide.
A beneficiary is the person who will receive your life insurance payment should you pass away. When choosing yours, it’s important to think about who would be most financially vulnerable without you in their life. For most people, this is their spouse or children.
If you’re yet to nominate your beneficiary for your Life Insurance, you can easily do so. Nominating a beneficiary may seem straightforward, but there are a number of things to be aware of and plan for.
1. If you don’t have a beneficiary
If you hold the policy in your name, your benefit will go to your estate and be managed as part of your will.
If you have outstanding debts when you pass away, your benefit may be used to pay them before it is distributed to the people named in your will – this means your loved ones could miss out on the payment.
2. Naming a beneficiary
Naming a beneficiary ensures your benefit is not paid to your estate and goes directly to the person you nominate.
It’s important to consider that if your beneficiary has any debts the proceeds might be used to pay them off. Keep in mind that if you nominate your children, they will only receive the full amount once they turn 18. Also consider what an 18-year-old might do with a large lump sum of money. You might instead want to arrange the proceeds go into a trust until your child is about 25 years old.
3. Having multiple beneficiaries
You can easily name multiple people as beneficiaries to your policy – you can check with your insurer as to how many beneficiaries can be named on your policy.
If you do decide to choose several people, it’s useful to designate a percentage of the payment to each person, as opposed to a specific amount (as this may change).
You should also consider having a contingency beneficiary, should a primary beneficiary pass away before or around the time of your passing (for example, in an accident).
4. Tax on death benefits for life insurance held within super
According to the Australian Taxation Office (ATO), when the life insured passes away, the amount in their super fund is typically paid to their nominated beneficiary/beneficiaries – although, this depends on the type of nomination made (i.e. binding or non-binding).
Generally, nominated beneficiaries do not pay tax on their benefits payout if the life insured’s policy is owned by an individual and is outside of superannuation. However, if the life insurance policy is held inside a superannuation fund, tax payments on these benefits are treated differently. When it comes to working out the tax on these death benefits and whether or not a beneficiary is a dependant, there are two laws considered:
- superannuation law, which sets out who a death benefit is payable to
- tax treatment (taxation law), which relates to how the death benefits will be taxed.
It’s important to note that adult children of the life insured are considered dependents under super laws, but not under taxation laws. Typically, this means that while they can still receive a death benefit, they may be required to pay tax on these benefits.
5. Keeping your beneficiary up to date
You should evaluate your beneficiary and policy at any major life event – for example, purchasing a home, having children, getting married, or at the death of a loved one.
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Remember, you can easily update your policy and beneficiary. And if you have any further questions concerning beneficiaries, feel free to CONTACT US for an obligation free meeting to discuss your options!
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Disclaimer: This editorial and the information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. The views expressed in this publication are solely those of the author; they are not reflective or indicative of Licensee’s position, and are not to be attributed to the Licensee. They cannot be reproduced in any form without the express written consent of the author. RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429.