It is important not only to select the appropriate amount of life insurance for your situation, but to own it in a way that will ensure that the proceeds of the insurance are paid in accordance with your wishes.
The Australian Financial Review recently reported that around a thrid of complaints made to the Superannuation Complaints Tribunal relate to a dispute about who death benefits are paid to.
This article will examine three different ways of owning an insurance policy for a typical family and highlight issues with each of the forms of ownership.
Our typical family is Adam and Tania who are married and have a son called Brad who is aged 5. Adam has been married previously and has a son from that earlier marriage called Toby who is 10. Adam’s ex-wife despises Tania and the feeling is mutual.
Adam and Tania do not have a will. We will only examine the position for Adam’s life insurance in this article for simplicity. Adam has determined that he should insure himself for $750,000 so that their mortgage of $250,000 is repaid which leaves $500,000 to generate a $30,000pa income for Tania.
The table below outlines 3 various ways of owning the insurance, and issues associated with each method of ownership. (note this is not an exhaustive list of ways of owning insurance policies)
| Life Insurance Ownership Method | Issues that Tania may face upon Adam’s death |
| Adam takes out $750,000 of life insurance through his personal superannuation fund (or industry fund) and makes a standard death benefit nomination intending to leave his benefits to Tania | A standard death benefit nomination doesn’t guarantee that the trustee of the super fund will pay the benefit to the nominated beneficiary. The trustee of the fund has discretion about who to pay the death benefit to. The trustee would consider that Adam died without a will and that he has 2 children to consider.
Under laws of intestacy (when someone dies without a will) in South Australia, the first $100,000 plus 50% of the estate is paid to the spouse and the remaining amount to any minor children. This means that Tania is unlikely to receive the full insurance amount and may at best receive $425,000 with the balance probably split between each of Adam’s children. This would only leave Tania with $175,000 after repaying the mortgage.
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| Adam purchases a $750,000 term life insurance policy outside of the superannuation system where Adam is the policy owner and the life insured | Upon Adam’s death, this insurance policy would become part of Adam’s estate and subject to the terms of his will. As Adam has died without a will, the policy would be subject to the laws of intestacy.
This means that in South Australia the first $100,000 and 50% of the remaining estate would be paid to Tania and the remaining amount divided between Brad and Toby.
Tania would be left with $175,000 after repaying the mortgage.
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| Adam purchases a $750,000 life insurance policy and the owners of the policy are Tania and Adam jointly. Adam is the life insured on the policy. | As the insurance policy is owned as joint tenants – under survivorship rules upon the death of Adam, the policy owner reverts solely to Tania.
This means that Tania would directly receive the $750,000 death benefit, bypassing Adam’s estate.
No provision in this solution for Toby. |
The purpose of this article is not to provide a definitive solution to Adam and Tania’s insurance needs, but to highlight that the outcomes from different ownership methods can be massive.
No two family circumstances are the same, and while there may be similarities, everyone’s situation is different. With this in mind we make the assertion that life insurance solutions must reflect this fact and that there is not a one size fits all approach to ownership of life insurance.
We strongly advocate that you discuss not just the amount of life insurance you should have with your adviser, but how it should be owned to fit in with your specific family circumstances. For those who already have insurance in place, now might be a good time to ensure that your life insurance ownership is right for your situation.
This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. RI Advice Group Pty Limited ABN 23 001 774 125 AFSL 238 429.