What happens with my life insurance after I die?


Who gets what?


When you take out a life insurance policy, generally it’s for the benefit of surviving heirs like a spouse or children. This is the same when you set up family trusts or other forms of asset protection. You want to make sure your loved ones are taken care of financially in your absence. This is especially the case if you are a primary breadwinner and/or you have a lot of debt (mortgage loan, business debts, etc). What, exactly, happens when you pass away, though? How are benefits transferred to loved ones? Will they be subject to taxation even though there's no estate tax in New Zealand? Should you place your life insurance policy into a trust structure for added protection? Here's what you need to know.


Death Benefits


When you pass away, your life insurance policy will pay out benefits to your named beneficiary as a tax-free lump sum. There are, however, some instances in which a claim may be denied. For example, some insurance providers have suicide clauses. Most have a waiting period of 1-2 years from the time you take out the policy. During which time insurers, may only pay out what you put in, rather than the full amount of the policy. Providing fraudulent information (like saying you don't smoke when you have a two-pack-a-day habit) or engaging in risky activities could also affect pay-out. Observe a relatively safe lifestyle. Thus, your beneficiaries shouldn’t have trouble receiving death benefits.




The benefits from a life insurance policy are not subject to estate tax. They aren’t subject to income tax either. This means that your loved ones shouldn’t have to claim the death benefits as income or as a gift.




Death benefits from a life insurance policy are not subject to the probate process. That means beneficiaries will not have to pay probate costs or declare the income. In other words, it is not made public. As a result, you might not see the need to place your policy in trust. At least, not in the same way it is important to set up a family home trust, for example. Perhaps you think there might be some contention over who you name as a beneficiary in your life insurance policy. Placing it in trust adds an extra layer of protection against potential contention. However, let’s say you decide to change the beneficiary of your policy at some point. Thus, you will have to change the name of the beneficiary listed in the trust, as well.


So why not learn more and register with TrustUs today.

After all, it's in your hands.