Life Insurance Beneficiaries: The Complete Guide

Last updated: 14/06/2023 | Estimated Reading Time: 16 minutes

Getting a life insurance policy is crucial if you want to support your loved ones financially after your death. But what happens if you’re on the other side of this equation as the life insurance beneficiary? In this case, how does life insurance work?

All of the rules and regulations surrounding life insurance policies can be difficult to go through as a life insurance beneficiary, especially while you’re still dealing with the loss of someone close to you. In this guide, we’ll walk through all of the questions you might have about life insurance beneficiaries, including how to know if you’re a beneficiary, how to make a life insurance claim and how to choose your own beneficiaries.

In This Guide:

Who Gets Life Insurance When You Die?

Your life insurance pays out to your named beneficiary or multiple beneficiaries when you die. These beneficiaries can be named within your policy, your will and/or your trust, depending on how you’ve set up your policy (more on this later).

If you have a joint policy with your partner, they will automatically become your beneficiary. After the first death within the couple, the policy will end.

Terminal Illness Benefit

In some cases, you can actually receive your life insurance payout yourself.

This is known as a terminal illness benefit or terminal illness cover. Certain life insurance providers include a terminal illness benefit as an add-on with some of their policies, which means that the policyholder can receive their payout before their death if they’ve been diagnosed with a terminal illness. Receiving this payout early can help families adjust to their new circumstances and will allow the policyholder to settle their financial affairs in advance.

To get the life insurance payout, the policyholder will have to prove to the insurance company that they’ve been diagnosed with a terminal illness and have less than 12 months to live.

Who Can Be a Beneficiary?

Most people choose their spouse or their children as their beneficiaries, but this doesn’t mean you have to do the same.

Anyone can be chosen as a life insurance beneficiary, but these are the most common options:

  • Spouses
  • Long-term partners
  • Children
  • Grandchildren
  • Parents
  • Siblings
  • Other relatives
  • Close friends
  • Charitable organisations 

If you’ve named a child as your beneficiary and you die before they turn 18, they won’t be able to have full control over the life insurance payout until they become an adult. Until then, their money must be managed by a guardian or a trust.

Before you make a decision, you need to think about your closest relationships, who would benefit the most from the money, and who you feel responsible for. Don’t let anyone pressure you into naming certain beneficiaries if you’re unsure.

How Many Beneficiaries Can Be on a Life Insurance Policy?

There’s no hard-and-fast rule for how many beneficiaries you’re allowed to have on your life insurance policy. You can choose one life insurance beneficiary if you wish, or you could nominate multiple people to receive percentages of the lump sum payout. You can give different amounts to different people, such as 50% to your spouse and 25% each to two children.

Can My Life Insurance Beneficiary Be Based in Another Country?

Yes! There are no rules stating that someone outside the UK can’t be a beneficiary on a UK-based life insurance policy.

However, the payout must be deposited in a UK bank account. This means that this international life insurance beneficiary must have a UK bank account to access their cash sum.

Can I Change the Beneficiary of My Life Insurance?

Many things can change over the course of your life, including who you’re close to and who you want to support financially. Since a life insurance policy can cover a large chunk of your life (or even your entire life if you’ve bought a whole-of-life insurance policy), you may find yourself wanting to change the beneficiary listed on your policy after a certain period of time.

Whether you can make this change will depend on if you’ve named revocable or irrevocable beneficiaries. A revocable beneficiary can be removed from your life insurance and replaced with someone else if you complete a ‘change of beneficiary’ form. You can request this form from your life insurance company. 

However, this process isn’t so simple for an irrevocable beneficiary. The only way to change this type of beneficiary is to complete the form and get written consent from the beneficiary to make the change.

If you’ve named the beneficiaries of your estate in your will, then all you need to do is rewrite this part of your will to change your life insurance beneficiary/beneficiaries. However, if you’ve also named the beneficiaries as part of your life insurance policy, then any changes to your will won’t supersede their rights as named beneficiaries.

What Happens to Life Insurance if a Beneficiary Dies Before the Policyholder?

Your policy term could last for a long time, and within this period, it’s possible for your beneficiary to die before you.

In this case, what happens to the life insurance payout? If you only had one beneficiary who passed away, then your payout would simply become part of the rest of your estate and would be divided by the executor of your will according to your wishes. If you died without a will, your estate (including the life insurance payout) would be divided according to intestacy laws.

Another option is to name primary and contingent beneficiaries. The primary beneficiary or beneficiaries would usually receive the entire lump sum, but if the primary beneficiary dies, the contingent beneficiaries would then receive the money instead. Most people choose their children as primary beneficiaries and their grandchildren as contingent beneficiaries.

Life Insurance Beneficiary Rules UK

Now that you know the basics of choosing a life insurance beneficiary, let’s go through some of the rules related to life insurance beneficiaries in more detail.

Do You Need a Beneficiary for Life Insurance?

You can choose to name your beneficiary/beneficiaries when you take out your new life insurance policy, but some insurance providers don’t require this. In this case, you can choose to not name a beneficiary on your policy.

Who Gets Life Insurance if There Is No Beneficiary?

If you don’t name a beneficiary when buying a policy, your life insurance payout will become part of your estate when you die. Then, your estate (including your payout) will be divided among the beneficiaries named in your will. The executor of your will is responsible for this.

What Happens if You Don’t Have a Will?

Having a will in place before you die is essential if you want to ensure that your money and assets go to the right people. This is especially important if you have dependants or a large number of assets to distribute, but ultimately it’s important for everyone to get their wills sorted.

However, what happens if someone dies without a will? Intestacy rules must be followed in this scenario, which means that the administrator of the estate will pay all of the deceased’s debts using money from the estate and then divide all of the deceased person’s assets (including the value of any life insurance policies) among the deceased’s relatives according to a specific order.

Does Life Insurance Automatically Go to Next-Of-Kin?

The deceased’s estate will either fully or mostly be transferred to their spouse if they were married. Spouses inherit everything within an estate if the total value is under £270,000. Half of any money above this threshold will go to the deceased’s children, while the other half will go to the spouse. 

Spouses receive everything if there are no children, and children receive everything if the deceased was unmarried. Non-married partners are not entitled to any money from the estate under intestacy rules.

If the deceased had no spouse and no children, their estate (including life insurance policy proceeds) would be granted to surviving family members in this order of priority, moving further down the list if there are no closer relatives.

  • Parents
  • Full siblings
  • Half siblings
  • Grandparents
  • Uncles and aunts
  • Their children (first cousins)
  • Half-uncles and half-aunts
  • Their children

Writing Your Life Insurance in Trust

Having a will is always extremely important if you want your money to go to the right people when you’re gone. However, with life insurance policies, there’s another way to protect your life insurance payout and make sure it goes to your chosen beneficiaries.

This is called writing your life insurance policy in trust. A trust is a legal arrangement to help you (the settlor) manage money and assets, such as a life insurance policy. By writing your life insurance policy in trust, you will appoint trustees to look after this policy and ensure that the money goes straight to your beneficiary/beneficiaries when you die.

Currently, around 6% of life insurance policies in the UK are written in trust. For many people, putting their life insurance policies in trust is a great way to protect their money and feel confident that it will go to the right place should the worst happen.

What Are the Three Types of Trusts?

There are three main types of trust to choose from: absolute trusts, discretionary trusts and flexible trusts.

An absolute trust, also known as a bare trust, is a type of trust where the settlor’s assets are held in the name of a trustee, who will look after them. The settlor nominates a beneficiary and the trustee looks after the money until the beneficiary receives it (e.g. when the settlor dies). These trusts are often used to hold money for children who will gain control of it once they reach the age of 18.

With a discretionary trust, the trustee or trustees can make decisions about how to use the money. For example, they may choose the beneficiary or beneficiaries, what gets paid out and any conditions to impose on the beneficiaries.

A flexible trust has two types of beneficiaries. The first type is the default beneficiary, who is entitled to any income from the trust as it arises. The second type is the discretionary beneficiary, who will only receive income from the trust if the trustees make appointments to them during the trust period. 

Can a Beneficiary Be a Trustee for a Life Insurance Trust?

You can choose a close friend, relative or solicitor to be a trustee. The person you choose should be someone you trust fully, and they should think carefully about their potential responsibilities before accepting.

In the UK, you could even choose your life insurance beneficiary as the trustee, as there are no laws against this. However, this wouldn’t be possible if your beneficiary is under the age of 18, as they would need an adult to manage their assets before they come of age.

Do Beneficiaries Pay Tax on Life Insurance?

Fortunately, life insurance payouts are not subject to income tax or capital gains tax. This will prevent the value of the payout from being eroded.

However, as life insurance proceeds become part of your estate upon your death, they will be subject to inheritance tax. This tax is paid at a rate of 40% on all money and assets within the deceased’s estate above the current threshold of £325,000. This means that if the value of your estate exceeds this amount, the executor of your will must pay this tax bill using your money and assets, including your life insurance policy.

There are ways you can legally reduce your tax liability, such as by transferring all of your assets to your spouse upon your death (allowing you to combine your tax-free thresholds), giving your house to your children and making tax-free cash gifts during your lifetime.

By putting your life insurance policy in trust, you can legally avoid paying any inheritance tax on this money. This is because your policy is no longer part of your estate once you put it in trust, which means it can go directly to your beneficiaries upon your death. Find out more about tax and life insurance here.

Can a Life Insurance Beneficiary Be Contested if a Power of Attorney Changes It?

If someone is named power of attorney over someone’s finances, they are legally allowed to change the beneficiary or beneficiaries of their life insurance policy if they have complete financial control.

However, if you believe that the person named power of attorney changed the life insurance beneficiary for their own benefit, you could challenge this in court. This will be a long and costly process, so seek legal advice as soon as possible if you believe the power of attorney has acted unlawfully.

What Happens When You Are the Beneficiary of a Life Insurance Policy?

The rules surrounding life insurance beneficiaries in the UK can be rather complex, so you may have many unanswered questions if you find yourself in this situation. 

How do you know if you’re a beneficiary? How do you start the life insurance claims process? Will life insurance pay out?

Find out the answers to all these burning questions below.

How Do You Know if You’re a Beneficiary?

The insurance company won’t track you down and contact you if you’re a beneficiary. Instead, you’ll need to discover this information on your own and then contact the company to make a death claim.

Usually, the policyholder will tell you if they’ve bought life cover and made you their beneficiary. Alternatively, the executor of the will could tell you this if you’re named as the beneficiary in the deceased’s will.

However, if you’ve not been told you’re the beneficiary, you might need to dig a little bit deeper. If you have access to your loved one’s financial records, you should check to see if they were paying monthly premiums to an insurance company. If they were, you should contact the company and ask them about the policy and the beneficiaries.

Finding a deceased person’s life insurance policy details can be tricky, especially if they’ve had the policy for a long time (e.g. whole-of-life insurance policies and term life insurance policies with a long policy term). If you’re struggling to find more information, you may need to hire an insurance specialist to help you discover the insurance company, whether you’re a beneficiary and how to file a death claim.

How to File a Life Insurance Claim After Death

To make a life insurance claim after the death of a loved one, you will need to have a few documents ready to prove the death and prove your identity. You will not have a valid claim without these key documents.

First of all, you’ll need to get in touch with the insurance company using the contact details on their website. You can typically contact them by post or by phone, but many providers now allow you to begin the claims process online. They’ll want to know the name of the deceased and their policy number.

Next, you’ll need to send the relevant documents. These include a copy of the death certificate, the policy documents and a completed claims form. This form should be found on the insurance provider’s website or given to you by the company.

Does Life Insurance Actually Pay Out?

At an already difficult time, you certainly don’t want to be worrying about your life insurance claim being rejected and losing the payout.

Fortunately, according to the Association of British Insurers (ABI), 99.6% of life insurance claims are paid out. As long as you have the correct documents and a completed claims form, everything should go smoothly, and if you have any issues with this, you can work through them with the insurance company.

You also don’t need to worry about rushing to meet a deadline while mourning the loss of your loved one and sorting out their affairs. There’s no time limit on filing a life insurance claim, so you can get to it when you feel ready.

How Long Does a Life Insurance Policy Take To Pay Out?

So, when is life insurance paid? On average, the insurance company pays the beneficiaries in 30-60 days, although this can depend on a few circumstances.

The insurance provider could take longer to pay you if they need to investigate the policyholder’s death. This is to make sure you have a valid claim, as deaths caused by drug abuse or reckless behaviour often aren’t covered. Suicides within the first year of the policy term also aren’t covered by most life insurance policies.

Writing a life insurance policy in trust can speed up the whole process. Without a trust, the payout will become part of the deceased’s estate, which will be divided by the executor of the will according to the deceased’s wishes. However, before the executor can legally manage the estate, they must apply for probate. The probate process can sometimes cause a delay.

What Are the Reasons Life Insurance Won’t Pay Out?

We looked at this briefly in the last section, but it’s important to consider this issue in more depth. Knowing the circumstances that can invalidate your life cover will help you avoid any problems with the claims process and ensure that your family can access the money you’ve left for them.

Here are the reasons why a life insurance policy won’t pay out:

  • The policyholder died outside of the policy term;
  • It is discovered that the policyholder lied on the application (e.g. they lied about their medical history during the medical underwriting process);
  • Insufficient documentation is provided during the claims process;
  • The type of death isn’t covered by the policy, e.g. death due to drug/alcohol abuse, death due to reckless behaviour (such as drink driving), death due to a risky hobby (depending on the insurance provider and policy) and suicide within the first year of the policy term;
  • The beneficiary was involved in the policyholder’s death.

Final Thoughts: Life Insurance Beneficiaries

Whether you’re thinking of buying life insurance or you’ve been told by a loved one that you’re their primary beneficiary, it’s essential that you have a solid understanding of life insurance beneficiary rules in the UK.

All of this new information can be overwhelming, but talking to experts, reading in-depth guides and comparing different insurance policies can help you make the right decision for you and your family. For more support and information on anything life insurance-related, browse the Money Expert website today. We can help you compare quotes, discover top providers and learn more about life insurance with our handy guides.