Category: Life Insurance | Reading Time: 4 minutes
Taking out life insurance is an important step, but there’s another crucial decision that many people overlook: choosing your beneficiaries. These are the people who will receive your policy payout, and getting this right ensures your money goes exactly where you intend.
Here’s everything you need to know about naming beneficiaries.
What is a beneficiary?
A beneficiary is simply the person—or people—who receive the payout from your life insurance if you die during the policy term. You can name anyone you like: your spouse, children, parents, siblings, friends, or even a charity close to your heart.
Most people choose their immediate family, but there are no strict rules. The important thing is choosing people who depend on you financially or who you want to support.
How to name beneficiaries
To name beneficiaries, you’ll need to write your life insurance policy in trust. This creates a legal arrangement where trustees manage the policy and ensure the money goes to your chosen beneficiaries when you die.
Without a trust, the payout typically goes to your estate and is distributed according to your will—or if you don’t have a will, according to intestacy rules. This can cause delays and potential tax complications.
Choosing multiple beneficiaries
You can name as many beneficiaries as you want, but you’ll need to decide how the money is divided. For example, you might allocate 50% to your spouse and 25% each to two children.
Being specific prevents disputes later. Without clear instructions, beneficiaries might disagree about how the money should be split, potentially leading to legal complications at an already difficult time.
What if your beneficiary is a child?
Children can be beneficiaries, but they can’t receive money directly until they turn 18. If you die before then, the funds are held by trustees or a guardian who manages them on their behalf.
This is actually helpful—it prevents an 18-year-old from suddenly receiving a large sum with no guidance on how to use it wisely. You can specify in the trust when and how the money is released, perhaps in stages at ages 21, 25, and 30.
Keeping beneficiaries up to date
Life changes, and your beneficiaries should reflect your current circumstances. Common triggers for updating include marriage, divorce, having children, or the death of a named beneficiary.
Depending on your trust type, you may or may not be able to change beneficiaries. An absolute trust fixes your beneficiaries permanently, whilst a discretionary trust allows flexibility. Your adviser can explain the options when setting up the policy.
Contingent beneficiaries
It’s wise to name contingent beneficiaries—backup recipients who inherit if your primary beneficiary dies before you. For instance, if you’ve named your spouse as primary beneficiary, you might name your children as contingent beneficiaries.
Without contingent beneficiaries, the payout might end up in your estate by default, which isn’t always what you’d want.
Tell your beneficiaries
Whilst the insurance company won’t contact your beneficiaries directly, it’s helpful to let them know they’ve been named. Share basic details about where to find your policy documents and who your adviser is. This simple step can save considerable stress and confusion later.
At Cover Direct, we help you set up trusts and choose beneficiaries as part of our service. We explain the different trust types and ensure everything is documented correctly. Get in touch today to get your protection properly organised.
FAQs
Q1: Can I name a charity as my beneficiary?
A: Yes, you can name charities alongside or instead of individuals. This is a meaningful way to support causes you care about. Simply include the charity’s registered name and charity number when setting up the trust. The charity will receive their allocated percentage of the payout directly.
Q2: What happens if I don’t name any beneficiaries?
A: If you haven’t written your policy in trust or named beneficiaries, the payout becomes part of your estate. It will be distributed according to your will, or if you don’t have one, according to intestacy laws. This can cause delays, may incur inheritance tax, and the money might not go where you’d have wanted.
Q3: Can my beneficiaries live abroad?
A: Yes, beneficiaries can live overseas. However, the payout must typically be deposited into a UK bank account first. The trustees or executor would then need to arrange transfer to the beneficiary’s overseas account. It’s worth discussing international beneficiaries with your adviser to ensure proper arrangements are in place.
