A Guide To Life Insurance & Probate

Although it’s 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.

What is probate?

Probate is a legal process that makes sure the instructions in a person’s 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 ‘grant of probate’.

If a grant of probate is given, it means the executor (the person responsible for dealing with the person’s estate) is free to distribute the person’s assets as outlined in their deceased person’s 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 aren’t 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 that’s jointly owned by the executor of the will can be distributed without a grant of probate.

• The will is contested. If there’s 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 it’s a good idea to check what’s required by the companies that hold the estate’s assets.

Often an executor of a will can access a loved one’s can access the deceased’s assets simply by providing documents like the valid will and a death certificate.

⚠️ Expert's note: Probate doesn’t apply in situations where a person didn’t leave a will. In those cases, each state has specific laws about how a person’s assets should be distributed.

Does life insurance go through probate?

Generally speaking, if a person has named a beneficiary on their policy, life insurance doesn’t have to go through probate.

In other words, if you’re the beneficiary of a loved one’s life insurance, you most likely won’t have to worry about applying for probate to make a claim.

In situations where a person didn’t 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.

Are life insurance policies considered part of a deceased person's estate?

No, a life insurance policy typically isn’t part of a deceased person’s 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 hasn’t chosen a beneficiary for their life insurance 

• Their beneficiary has passed away

If this is the case, the payout may go to the person’s 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 you’re the beneficiary of a loved one’s 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 ‘life cover’ or ‘death cover’).

For other types of life insurance, like TPD insurance and income protection insurance, you can make a life insurance claim yourself. 

Find out more about the different types of life insurance here.

Who should your life insurance beneficiary be?

It’s 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 –  for example, 50% to your partner and 50% to your child.

No matter who you choose, let them know they’re a beneficiary. They’ll be responsible for making a claim if you pass away.

What’s 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 isn’t 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 don’t 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 who’s under 18. Keep in mind if you want to nominate your children, the payout will only be made to them once they turn 18. 

• 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. It’s worth naming an alternate beneficiary in case something happens to your main beneficiary. 

• Not telling your beneficiary. Your beneficiary will need to make a claim if you pass away, so let them know you’ve 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. 

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.

What 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 – someone who can make decisions for you if you’re 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. 

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

It’s 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 you’re considering life insurance for the first time or thinking about switching policies, you can compare your options with us in just minutes. 

Click below to get started.

This guide is opinion only and should not be taken as medical or financial advice. Check with a financial professional before making any decisions.