Know the difference between binding versus non-binding beneficiaries
When you buy life insurance, you usually do it with a specific goal in mind – like eliminating debts or providing for loved ones. So how do you make sure your money ends up in the right hands?
Nominating a beneficiary with your insurer can help give you that certainty. But there are a few questions you should ask yourself before you decide who to nominate.
What is a life insurance beneficiary?
A life insurance beneficiary is the person/s who will be receiving your life insurance payment should you pass away.
One or multiple?
Many people choose their partner or spouse as their sole beneficiary. However, most insurers also give you the option to choose multiple beneficiaries if you wish – in which case you’d typically nominate a percentage for each person.
This may help avoid delays or disputes in getting your benefit to the intended recipients. However, if you’re thinking of using this option to nominate your children, you need to be careful about the tax implications (see next question).
Outside or inside super?
The way your policy is owned impacts the way life cover benefits are taxed.
- If your cover is held outside super, you can nominate anyone you like to be your beneficiary(s) and they won’t need to pay tax on the life cover benefit they receive (unless the policy is owned by a business).
- If your cover is held inside super, only your spouse/de facto or a financially-dependent child can receive a life cover benefit tax-free. Anyone else may need to pay 30% tax or more on the money they receive.
This is also a good reason to review your beneficiaries over time. For example, your child may be financially-dependent now, but they may be an independent adult by the time a benefit is paid – which could mean they need to pay tax on that money.
If you have life insurance inside super and you’re concerned about your beneficiaries paying tax, a solicitor can help provide you with all the options available to avoid that outcome.
Binding or non-binding nomination?
If your policy is held inside super, making a ‘binding death benefit nomination’ will direct the super fund how to pay your benefit.
If you’ve made a ‘non-binding nomination’, or no nomination at all (see more below), there is more discretion for the trustee of the superannuation fund to decide where your money should go – which could lead to delays, disputes or unintended outcomes.
If you make a binding nomination, you will need to update this nomination every three years unless you make it ‘non-lapsing’.
What happens if you don't nominate a beneficiary?
You would usually nominate a beneficiary aspart of the application process for life insurance. However, if your nominationhas lapsed or that person is no longer alive, the death benefit will be paid toyour estate where it will be distributed with all of your other assets –usually to your spouse and children and/or in accordance with your Will.
Are any of your beneficiaries ‘vulnerable’?
There may be situations where you want certain beneficiaries to be looked after financially, but you’re not comfortable leaving a large amount of money to them personally.
For example, say one of your children is susceptible to drugs, alcohol or gambling. In this case, you may arrange for their benefit to be held in trust rather than paid to them as a lump sum. That way the money can be professionally managed and distributed gradually, or when they reach a certain age.
Need advice?
A financial adviser can help you structure your life insurance in a way that best suits your goals, budget and the needs of your beneficiaries. You may also want to talk to a solicitor about your broader estate planning goals, bearing in mind your life insurance is only part of the story.
