Does a life insurance payout form part of my estate when I die?
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In this series of articles, we answer commonly-asked questions about estate planning – wills, enduring powers of attorney and estate administration – to help you and your whānau make informed decisions.
Public Trust's Regan Higgie steps through some important things to think about when it comes to life insurance.
Question from Sarah*. My husband and I both have life insurance policies. What happens to the insurance payout when one of us dies? Does it go directly to the other person, or form part of the estate?
This is an important topic. What happens to the payout when you die depends on how the policy is structured.
1. Owning a life insurance policy over your own life
If you are the owner of a life insurance policy over your own life, the life insurance payout forms part of your estate when you die.
This means your estate will likely be administered through the courts, as the policy payout would probably increase the estate value to over $40,000, triggering formal administration requirements. This can take time, cost money and means the money may not be available promptly to beneficiaries.
Your will can set out what is to happen to the life insurance payout. For example, you may wish to gift the money to someone you care about, or you may want your executor to use it towards repayment of a specific debt, like your mortgage.
2. Owning a life insurance policy over someone else’s life OR owning a life insurance policy over your own life jointly with someone else
Owning a life insurance policy jointly with someone else over your own life, or over someone else’s life (like your spouse or partner’s) means that the life insurance payout will not form part of the deceased’s person’s estate. It will instead be paid straight to the policy owner(s).
As a result, the life insurance payout is not subject to the estate administration process.
Important things to know:
Review your insurance and will regularly
If it has been a while since you reviewed your life insurance policy, refresh yourself on the structure and check it still meets your needs. Review your will every five years or when major life changes happen. If you have a relationship separation or death of a partner, review your life insurance policy and your will.
It’s important to understand whether or not your life insurance forms part of your estate so you can ensure your life insurance and will work together how you intend.
It’s a good idea to get legal advice if you’re unsure.
Collecting a life insurance policy
Collecting a life insurance policy is relatively simple and involves providing proof of death and also proof of authority (probate, letters of administration) for the person applying.
One thing that can cause a delay is if someone dies and their cause of death is subject to a coroner’s report. Some policies can have exclusions for certain causes of death (such as when someone ends their own life). A coroner’s report can take some time to be issued, which may cause a delay in the administration of the estate.
In some cases, a life insurance company may refuse to pay out. It is important the executor of the will reviews the policy and ensures this is a fair application of the policy.
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*Names have been changed for privacy reasons.