Life insurance beneficiary rules UK

Choosing who to name as a beneficiary can be a difficult decision, especially if you have many loved ones.

If you have a partner or children, you may choose to name them as your beneficiaries to ensure they won’t struggle financially upon your passing.

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 don’t have to leave your pay out to a person.

If you have a charity that’s close to your heart, it’s completely 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.

Yes, children can be named as beneficiaries. However, children under the age of 18 won’t directly receive the pay out.

Typically, a guardian will be appointed to manage the money until the child turns 18.

Alternatively, if you’ve written the policy in trust, the trustee will be responsible for the funds until the child is of age.

Yes, in most cases you’ll be required to name at least one beneficiary who’ll benefit from your life insurance pay out.

If for some reason, you pass away without any beneficiaries your life insurance will be added to your estate.

If you’ve left a will your estate will be divided as per you wishes. However, if you haven’t 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 one’s benefit from your selfless investment.

We have written a helpful How to find out if someone has a Will guide if you require additional information »

If you have multiple beneficiaries, you may wonder how your pay out will be divided.

Again, it’s 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.

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’ve written your policy into trust, the trustee will be responsible for ensuring your pay out is distributed as per your wishes.

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’s distributed as per your wishes (similar to 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 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’re single or divorced, or £650,00 for those who’re 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.

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.

The process may vary between providers, but you’ll be guided through what to do by the claims 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’ll 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.

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.

In the event that 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.

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