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When purchasing life insurance, you want to be sure that the financial protection you are buying pays out exactly how it is supposed to, going where you always wanted it to go.
People purchase life insurance for many reasons: to pay off mortgages, long-term loans or financial relief for their loved ones.
If you want to make sure your life insurance payout goes to the right place, it is important to know how beneficiaries work in relation.
Life insurance is a form of insurance that pays out upon the policyholder’s death.
It is purchased by the policyholder and can either cover just them as a single person, or jointly with a partner (it will usually only pay out once).
The coverage life insurance provides awards (subject to a valid claim made) a payout that can be used to pay off a policyholder’s debt obligations such as a mortgage or long-term loan. It can also be granted to a beneficiary for their own personal needs.
A beneficiary is the individual or series of individuals who will derive the “benefit” – essentially receive the payout – of the life insurance policy.
A common misconception is that the beneficiary of a life insurance policy must be related to the policyholder in some way. For example a relative, a partner or a child of the policyholder.
However, the beneficiary of a life insurance policy can be anyone: relative, partner or otherwise.
You might have a business partner for example, or perhaps you are the last remaining member of your family and you would like the payout to go to an institution dear to your heart.
The most important thing that needs to be done is for the name of the selected beneficiary to be noted on the insurance documentation.
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The question of who the beneficiary to a life insurance policy should be is purely for the policyholder to decide, and there is no right or wrong answer.
Because anyone can be named a beneficiary, this can make the question of “who should it be?”, both easier and more difficult at the same time.
There is more flexibility on who can be noted down, but then again this opens the options up to a wider range of people around you.
What we would recommend is that you take time to answer this question, looking at those closest to you who might need financial assistance after you are gone.
Not only that however, but also who would use such a benefit in the most effective and productive way.
If it is the case that someone who is in need of money might use it poorly, you could also choose to put the award in trust: this means the money would be held, controlled and distributed by a trustee who distributes the money to a beneficiary as initially directed by the policyholder.
An advantage of this is that not only is the award given in a more tax efficient way (as it is not subject to inheritance tax), but also your proposed beneficiary will only be able to draw the money for use in a way that is best for them, and for what you originally envisioned.
There are numerous beneficiary rules written into UK law, however in relation to life insurance there are really only two that are of the most importance.
The first is that at least one beneficiary must be named on a life insurance policy.
The second is that on the policyholder’s passing, a beneficiary must provide evidence with a Certificate of Death in order to make a claim from said life insurance policy.
It is up to the policyholder as to how many beneficiaries can be on a single life insurance policy. It can be as many or as little as you, the policyholder, would like.
Of course if you have other obligations that need to be met before distributing any further monies to a beneficiary (such as a mortgage for example), it would be wise to make sure a suitable amount of funds are allocated to those costs.
When it comes to multiple beneficiaries, you can split the life award out however you like, whether as a percentage or a specific monetary amount.
So for example you might give your spouse 50% and two children 25% each.
Children are allowed to be named as beneficiaries, and indeed it is common practice to do so. Should they be under eighteen years old on collection however, the money will not go directly to them.
Under the Uniform Transfers to Minors Act, a custodian will be appointed as a guardian of the payout intended for the child until they are no longer under eighteen.
Typically the guardian will either be appointed by the policyholder, or if not specified, the next closest relative that is over eighteen.
Of course, rather than provide a big lump-sum to a child on their eighteenth birthday it might be more advisable to place the proceeds into a trust, so that the money is appropriately used.
In most cases one would expect the policyholder to notify potential beneficiaries of their status on a life policy – however sometimes mishaps occur, things change or indeed get lost over time.
If you think you might be the beneficiary of a life insurance policy, you can call up the life insurance provider and begin enquiries there.
If you do not know who the provider is but still think you might have a claim, you can also take on the services of an asset search specialist who, using various resources, can give you further advice and any potential next steps.