Estate Planning and Life Insurance

The purpose of life insurance is to provide a cash payment for your loved ones in the event you unexpectedly pass away. The policy may also provide a payment if you are permanently disabled or suffer a critical illness. The payment can be used to support your spouse and children or to pay down debts. It can also be used to meet your tax obligations, to give a beneficiary cash in lieu of other assets, or for a donation to charity.

You can hold your life insurance through a policy taken out personally or through your super fund.

It is important to consider who will receive the proceeds from your life insurance policy and how to minimise taxes and other claims on the cash.

Who will receive the proceeds from your policy?

There are some traps, which could mean the difference between the money going directly to your family, or being used to pay outstanding debts and obligations.

Holding the policy in your own name.

If you are the owner of the policy, the proceeds will go to your Estate and be dealt with in accordance with your Will. If you do not specify in your Will who is to receive the life insurance proceeds, they will form part of your “residual Estate” and be paid to your residual beneficiaries.

If you have outstanding debts or other claims against you when you pass away then your Estate assets (including the proceeds from the policy) may be used to pay these debts and obligations, which may result in your dependents missing out.

A person may challenge it your Will if they consider that it does not adequately provide for them. If the challenge succeeds, they may take a larger portion of the insurance proceeds than you intended.

Naming a beneficiary to receive the proceeds.

If instead you name a beneficiary under the policy, the proceeds will not be paid to your Estate: they will go directly to the named beneficiary who will receive the proceeds outright after your passing.

If a beneficiary has unsatisfied debts or liabilities, the proceeds may be used to satisfy those claims. If the beneficiary is a child, they will be entitled to the full amount of those proceeds when they reach 18, which could be too early for them to properly handle the money.

Consider using a ‘testamentary trust’ in your Will.

If you want the proceeds from life insurance paid to your Estate, you should consider including a testamentary trust in your Will to ensure that your objectives for your life insurance are met. A testamentary trust will:

  1. Ensure that the proceeds are passed to your intended beneficiaries, as and when you direct. For example, you may specify that the proceeds are to be paid to young beneficiaries over time;
  2. give your beneficiaries capital gains and income tax advantages, particularly if they are under 18; and
  3. Provide a significant level of protection for assets in the event a beneficiary becomes bankrupt or divorced.

Insurance through super

If you hold a life insurance policy through your super fund, then your options regarding who receives the proceeds are more restricted and the tax considerations are more complex than if the policy is held outside super.

If your life insurance policy is held through your super fund:

  1. You may nominate either your Estate or a person who qualifies as a “dependent” for superannuation law purposes to receive the super proceeds. If your nomination is not a valid binding nomination, the trustee of the super fund has the authority to overrule your nomination to ensure that your benefits are distributed appropriately; and
  2. if the beneficiary is not also a “dependent” for tax law purposes, (which is a slightly different definition than for superannuation law purposes) there may be an additional layer of tax on the payout to the beneficiary.

Contact us to ensure that your life insurance ties in with your estate planning and that your dependents are properly looked after as you intend.

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