In this article we explain what happens to your life insurance policy payout when you die. We explain the life insurance claims process, how long it takes, who gets the money and whether you can change who gets it.
We also explain how to buy a life insurance policy, nominate your beneficiary and get £100 cashback*.
How does life insurance work when you die?
Firstly, you should make arrangements for someone to deal with the life insurance claim well in advance of your death (wherever possible) and ensure that they have the relevant life insurance company information and policy documents to hand (including policy number).
Ideally, that person would then need the following information/documentation to hand:
- a death certificate
- confirmation of the cause of death of the policyholder
- date of death
- was the death outside the UK?
- is there a will in place?
- your contact details and relationship to the deceased
- are solicitors dealing with the estate (if so, it is best to have these contact details to hand)
Ensuring that the policy is 'arranged in a trust' is a great way to speed up a life insurance payout once the insurance company has agreed to pay. The trust can also ensure that future beneficiaries are not liable for any inheritance tax.
Most life insurance policies can be placed in a trust, including term life insurance policies, whole of life insurance policies and over 50s life insurance cover. We explain more about how you can place your policy into trust later in this article.
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How do you name a beneficiary on your life insurance policy?
When you take out a life insurance policy you may be asked to name a beneficiary on the form and the proceeds will be paid to the named person in the event of a successful claim.
The named life insurance beneficiary is usually a family member but it can be anyone you wish to benefit. The payout can be a lump sum payment or a regular income payment depending on the type of life insurance you choose.
You may wish to complete a trust form which will ensure that the policy is paid out quickly, as it avoids the need for probate. A trust form also ensures that the proceeds do not form part of the estate for inheritance tax purposes so your beneficiaries will not have to pay any tax on the money they receive. We explain trust forms in more detail below, including how to request and complete one.
Who will receive a terminal illness claim payout?
A terminal illness claim is an early death claim and can be retained by the person who is insured. If you complete a trust form, there will usually be an option to retain the terminal illness claim payout in this scenario. It is important to understand that if you do this, the money will usually form part of your estate for inheritance tax purposes once you die. Choosing not to retain the payment for terminal illness will mean that your nominated beneficiaries will receive the claim money, keeping it outside of your estate.
What is a trust form and how to complete one
According to a report released by insurance company Swiss Re in 2023, only 13% of life insurance policies have been written into 'trust'. Putting a life insurance policy into trust is a simple process that can take just a few minutes and ensures that the proceeds of a life insurance policy are paid out swiftly (without the need for probate) and without needing to form part of your estate for inheritance tax purposes. The easiest way to place your policy into trust is to contact the insurer directly. They should be able to send out the relevant forms and guide you through the process. The forms are relatively straightforward so you shouldn't need to speak to a solicitor, however, if you have multiple beneficiaries or your situation is more complex then it may be sensible to seek advice.
Some insurance brokers such as LifeSearch* have a dedicated trust team and they even have a dedicated online service that is free to use and enables you to place your policy into trust online within 10 minutes. As well as a dedicated trust team, LifeSearch also have a dedicated claims team that will handle a death claim from start to finish.
If you are thinking of buying life insurance, then you should consider using an independent life insurance broker such as LifeSearch*. The advisers will be able to search the whole of the market to ensure you are paying the lowest possible price, as well as providing free services such as its dedicated Trust Builder and claims service.
How long does a life insurance policy take to pay out?
Some claims can take as little as a few days however some claims can take significantly longer. Insurance companies will check the cause of death and if death was caused by illness it is quite normal for the claim assessment to include a request for a doctor's report. This will reveal whether the insured person answered the life insurance application questions honestly so that the life insurance claim can be authorised and paid out. Once the claims form has been completed and all relevant documents are submitted to the insurance company, the average claim time is around 30 days, however, if there is a trust form in place this can be significantly reduced.
Once the life insurance company pays the death claim the money will either be paid to the deceased person's estate or (if they arranged a trust) it will be paid into the trust. Money that is paid to the estate will usually only be distributed to the beneficiaries once probate has been completed - this can take months and even years in some cases depending on how complex your estate is. So it is vital that you consider arranging a trust if you would like the life insurance money to reach your beneficiaries swiftly.
What if my life insurance policy doesn't have a named beneficiary?
If there are no named beneficiaries on a life insurance policy and there is no trust in place then the life insurance pays the amount due to the deceased's estate and, depending on whether a will is in place, could be paid as per the rules of intestacy. As we have mentioned previously in this article, the best way to ensure the proceeds of your policy are paid quickly and without the need for inheritance tax is to place your policy into trust.
Can you change the beneficiary on a life insurance policy?
Insurance companies allow you to name a beneficiary as either revocable or irrevocable and if your beneficiary is named as a revocable beneficiary, then the process is relatively straightforward. You simply need to contact the insurance company and request a 'change of beneficiary' form. The form can be sent by email or post and once completed, signed and returned, it will usually only take the insurer around 48 hours to apply the changes.
If the beneficiary is 'irrevocable', then the process is a little trickier, as this would usually mean that you cannot change your mind and the named beneficiary would be entitled to receive a payout (or percentage of the payout). The insurer may, however, allow you to change the beneficiary if the named beneficiary provides written consent that they request to no longer be named as a beneficiary.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article - LifeSearch