TPD & Life Insurance
6. Beneficiaries & Nominations
Authors: Staff Legal Eagle
Firm / Chambers:
Last updated: 11 Aug 2015
- Generally the following three parties are relevant for a life insurance policy:
- the insured person or ‘life insured’;
- the insurer which is the insurance company; and
- the legal owner of the policy.
- Insurance is paid out to the legal owner of the policy who does not have to be related to the life insured. The legal owner of the policy is usually:
- the spouse;
- a family trust;
- a business partner;
- an employer; or
- the life insured.
- It is very important to carefully plan a life insurance plan for couples. There are different policy ownerships and most couples either take out:
- single owner policies for example the husband is the owner of his wife’s life insurance policy; or
- joint owner policies for example where a husband and wife are insured under one policy.
- Single owner polices can lead to complications if the marriage or relationship breaks down. For example if the husband and wife separate and the husband is the sole owner of the wife’s life insurance policy then the wife cannot make changes to the policy on her life or nominate a new beneficiary.
- A policy owner has the option to nominate one or more beneficiaries under the insurance policy. Although it is not mandatory to nominate a beneficiary under an insurance policy it is strongly recommended that you list any beneficiaries as this ensures that the benefits go to the right person or people. A beneficiary can be a:
- natural person;
- corporation; or
- trust.
- Policy holders must nominate their dependants as beneficiaries under the policy or alternatively their legal representative. A dependant is defined as:
- a spouse or de facto spouse;
- children including adopted children;
- a financially dependent person; or
- a person who shared a close personal relationship with the life insured.
- There are two types of nominations: a binding nomination and a non-binding nomination.
- Under the law a properly executed binding nomination ensures that the person or people nominated as beneficiaries receive the benefits under an insurance policy.
- To make a binding nomination the policy owner must sign and date the nomination in front of 2 witnesses. The witnesses must be above 18 years of age and cannot be listed as beneficiaries under the policy.
- A binding nomination will be considered invalid if it is unlawful or in breach of a court order. A binding nomination is invalid if:
- you do not renew the binding nomination every three years;
- the nominated beneficiary dies before the life insured;
- the nominated beneficiary is not a dependant of the life insured or their legal representative; or
- your personal circumstances change after signing the binding nomination.
- Personal circumstances can change quite easily for example if you enter into a new marriage or de facto relationship, have a baby or if your relationship breaks down.
- A non-binding nomination is also known as a ‘preferred nomination.’
- If the policy owner makes a non-binding nomination the insurance company decides which beneficiaries and in what proportion receive benefit under the insurance policy.
- The insurance company may not necessarily agree with the non-binding nomination and may make changes to the distribution of benefits that are appropriate at the time of the policy owner’s death.
- If a policy holder’s personal circumstances change for example through divorce or death of a spouse the beneficiaries listed under the insurance policy can easily be updated. Most policies require the policy holder to submit a Beneficiary Nomination Form to update the beneficiaries.
- If you have more than one beneficiary you must also state the distribution in percentages that must total 100%. For example if John has nominated 3 people as beneficiaries under his life insurance policy: Molly, Anna and Ben he must specify the benefits he intends each person to receive.
- Molly to get 50% of the benefit;
- Anna to get 25% of the benefit; and
- Ben to get 25 % of the benefit.
- There are serious implications of not nominating beneficiaries under a life insurance policy including that:
- if the legal owner of the policy is also the life insured and there are no beneficiary nominations the benefit is usually paid to the life insured’s estate and distributed according to a Will or the state intestacy laws if there is no Will;
- if a nominated beneficiary dies and the policy holder has not updated their nominations then the money that was to go to the deceased beneficiary will be paid to the life insured’s estate; and
- under a super fund if there is no binding beneficiary nomination the super trustee decides who gets the benefits on the death of the policy holder. Benefits are paid according to the law and are generally given to the life insured’s dependents at the time of his or her death.
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