Life insurance: do you have enough to look after your loved ones when you die?

Many people think that the life insurance they have with their super fund will be enough to pass on to their loved ones after they die and don’t check to see how much they actually have.

With most super insurance policies, the amount decreases sharply the older you get and eventually falls away entirely.

According to a 2017 report by Rice Warner, the median cover level of life insurance in super is approximately $143,500 – about twice the median household income, which is nowhere near enough to keep your family comfortable after you die.

If you have a mortgage – or multiple mortgages – you run the risk of these assets not being paid off after your death, which means the people who are left behind would have to cover the gap or the executor will have to dispose of the assets to pay out the mortgages.

Who will get your life insurance money when you die?

Your life insurance policy can be left to nominated beneficiaries, or you can direct it to be paid to your estate, which might be the best option if you have multiple properties with mortgages owing.

When you nominate your beneficiaries they need to be someone who will suffer a financial loss in the event that you have died – these are people who are said to have an “insurable interest” with you.  This might be your spouse, children, parents or siblings, but you may also nominate close friends, business partners or to leave the proceeds of the policy to a trust.

If you fail to name any beneficiaries of your life insurance policy, the insurer will have to determine who receives funds in the event of your death.

You should always inform your loved ones that they are a beneficiary of your life insurance policy, because the likelihood is that they will be the ones to notify the insurer that you have died so they can make a claim. You should also let them know where they policy details can be found.

Sometimes your circumstances may change. You may have new dependents, you may divorce or remarry, you may no longer want to include certain people as beneficiaries, or perhaps some of those beneficiaries have passed away already. It’s important to keep your life insurance beneficiaries up-to-date, just as you would with your will, to reflect what your wishes would have been prior to your death.

It’s also worth noting that a minor cannot access life insurance proceeds until they turn 18. If you want your life insurance to look after minor children, you will need to put it into a trust for them. You also may decide that 18 is too young to inherit a lump sum and decide they can access the money only when they are older.

What happens to life insurance inside your superannuation?

When you have life insurance inside your superannuation fund you can only nominate your estate or a person who qualifies as a dependent under superannuation law to receive the proceeds of this policy.

As per the rules of where your super goes when you die, if you haven’t named a valid beneficiary then the trustee of the superfund can make the decision on your behalf, according to the rules of the fund, and distribute the funds accordingly.