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A Guide To Life Insurance & Probate
Although itâs something most of us prefer not to think about, if a loved one passes away there are often steps that need to be taken to manage their finances.
In some situations, one of those steps is probate.
But what exactly is probate? And how does it relate to life insurance? This guide takes you through everything you need to know.
Key Points
Probate is a legal process that makes sure the instructions in a personâs will are valid.Â
You can apply for probate through your stateâs Supreme Court.
Probate is sometimes needed if a deceased person has left assets that arenât jointly owned, or if someone contests a will.
Keeping your life insurance policy up to date can help your loved ones avoid having to go through probate if you pass away.
What is probate?
Probate is a legal process that makes sure the instructions in a personâs will are valid.
It involves registering a will with the local Supreme Court in your state, which then assesses whether or not to provide a legal document known as a âgrant of probateâ.
If a grant of probate is given, it means the executor (the person responsible for dealing with the personâs estate) is free to distribute the personâs assets as outlined in their deceased personâs will.
When is probate necessary?
There are three common scenarios in which probate is sometimes needed:
The person has left an asset holder - such as a bank - that will require a grant of probate:
A person dies leaving assets that arenât jointly owned. For example, many banks will ask for a grant of probate before releasing funds, unless those funds are held in an if the deceased person was the sole account holder.
In contrast, funds held in a joint bank account thatâs jointly owned by the executor of the will can be distributed without a grant of probate.
The will is contested. If thereâs a dispute about whether or not the will is valid, probate can sometimes help settle the matter.
Probate can be a lengthy and complex process, so itâs a good idea to check whatâs required by the companies that hold the estateâs assets.
Often an executor of a will can access a loved oneâs can access the deceasedâs assets simply by providing documents like the valid will and a death certificate.
â ď¸ Expert's note: Probate doesnât apply in situations where a person didnât leave a will. In those cases, each state has specific laws about how a personâs assets should be distributed.
Does life insurance go through probate?
Generally speaking, if a person has named a beneficiary on their policy, life insurance doesnât have to go through probate.
In other words, if youâre the beneficiary of a loved oneâs life insurance, you most likely wonât have to worry about applying for probate to make a claim.
In situations where a person didnât nominate a beneficiary, or the beneficiary has passed away, a grant of probate might be needed to figure out how the payout will be distributed.
Compare & SaveAre life insurance policies considered part of a deceased person's estate?
No, a life insurance policy typically isnât part of a deceased personâs estate or covered by their will.
Instead, the policy itself usually includes specific information about who should receive the payout (aka the beneficiary) if they pass away.
There are some exceptions to this, such as
 If a person hasnât chosen a beneficiary for their life insuranceÂ
Their beneficiary has passed away
If this is the case, the payout may go to the personâs estate and be managed as part of their will.
What is a beneficiary?
A beneficiary is a person you choose to receive your life insurance payment if you pass away.
You can also name more than one person, or an organisation or a charity, as a beneficiary.
If youâre the beneficiary of a loved oneâs life insurance policy, you can make a claim for a payout if they pass away.
You only need to choose a beneficiary for term life insurance (also known as âlife coverâ or âdeath coverâ).
For other types of life insurance, like TPD insurance and income protection insurance, you can make a life insurance claim yourself.Â
Find out more about the different types of life insurance here.
Who should your life insurance beneficiary be?
Itâs completely up to you and your personal circumstances. A lot of people chose to name somebody who depends on their income, like their partner, children, parents or siblings. Some people choose a close friend, business partner or even an organisation.
If you name more than one beneficiary, you'll need to choose how to split the payout â for example, 50% to your partner and 50% to your child.
No matter who you choose, let them know theyâre a beneficiary. Theyâll be responsible for making a claim if you pass away.
Compare & SaveWhatâs the difference between a binding and a non-binding nomination?
If you have life insurance through your super, you can choose to name either a binding or non-binding beneficiary.
A binding nomination is legally binding. This means your fund's trustee must pay out your funds to that beneficiary.
Some binding nominations expire after a certain period and you need to re-nominate.
A non-binding nomination isnât legally binding. You can think of this as a suggestion you make about who your beneficiary should be, but the final decision lies with the fund's trustee.
If you have life insurance outside of super, you donât have to worry about binding and non-binding nominations.
The beneficiary or beneficiaries you choose are listed on your policy and can make a claim if you pass away.
What mistakes should you avoid when choosing a life insurance policy beneficiary?
There are a few potential mistakes to consider when choosing a beneficiary:
Naming someone whoâs under 18. Keep in mind if you want to nominate your children, the payout will only be made to them once they turn 18.Â
Being unclear. Make sure your policy is clear about who the payout will go to and what percentage they'll get.
Not naming a backup beneficiary. Itâs worth naming an alternate beneficiary in case something happens to your main beneficiary.Â
Not telling your beneficiary. Your beneficiary will need to make a claim if you pass away, so let them know youâve nominated them.
Are proceeds from cashing in a life insurance policy taxable?
Generally no, if your life insurance payout goes to your financial dependents, like a partner or minor children.Â
Adult children, business partners and anyone else who doesn't rely on you for financial stability could pay up to 35% in tax on the payout.
You can learn more about taxes on life insurance payouts here.
Compare & SaveWhat is estate planning?
Estate planning is a broad term for planning what you want to happen to your assets and affairs when you pass away. It can include:
Writing a will
Organising life insurance
Nominating a beneficiary for your life insurance payout
Choosing a power of attorney â someone who can make decisions for you if youâre no longer able to manage your own affairs
What are the benefits and risks with estate planning?
There are plenty of reasons estate planning is beneficial. Most importantly though, it helps ensure that your assets are passed on to the right people if you pass away, and provides future financial stability for your loved ones.Â
Having a clear estate plan can also help your loved ones avoid the stress of having to go through probate during an emotionally difficult time.
The bottom line
Itâs never too early to start thinking about an estate plan.
Choosing the right life insurance is an important piece of the puzzle to ensure your loved ones are looked after financially when you're no longer around.
Whether youâre considering life insurance for the first time or thinking about switching policies, you can compare your options with us in just minutes.Â
Click below to get started.
Compare & SaveThis guide is opinion only and should not be taken as medical or financial advice. Check with a financial professional before making any decisions.
Matthew Lang is the general manager of life insurance at Compare Club. Matthew leads a team of dedicated professionals who are passionate about helping individuals and families make informed decisions about their life insurance needs. Whether it's finding the right coverage for your specific circumstances, comparing policies, or optimizing your existing policy, Matthew and his team are here to provide expert guidance and support.
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Meet our life insurance expert, Matthew Lang
Matthew's top life insurance tips
- 1
Identify what you want out of life insurance before you buy. Knowing the purpose of your life cover will help you choose a policy that meets your needs.
- 2
It's easy to assume that the sole purpose of life cover is to leave money behind for your family, but there's more to it than that.
- 3
Life insurers like those on our panel pay an average of 97% of claims in full.
- 4
There are different types of life insurance, including term life insurance, income protection, trauma cover and total and permanent disability cover.