Life insurance and death benefits

For many people, the largest sums payable on death come from life insurance and pension death benefits rather than from assets in the estate.

These frequently pass outside the will, and the paperwork that governs them is a form most people completed once and never looked at again.

Why beneficiary designations matter more than the will

Where a policy or pension names a beneficiary, the proceeds generally pass directly to that person, outside the estate and outside the will.

Which means a will leaving everything to a current spouse does not redirect a policy naming a former one.

This is the single most common and most consequential planning failure in this area. Divorce, remarriage, the death of a named beneficiary, and estrangement all occur, and the form does not update itself.

Check every designation you have. Life insurance, pensions, death-in-service benefits, and any other product with a nomination. This takes an afternoon and it is the highest-value review most people can do.

Writing insurance in trust

In several jurisdictions, a life policy can be written in trust for named beneficiaries.

The consequences are generally favourable: the proceeds pass outside the estate, which may keep them outside estate or inheritance tax; they pay out without waiting for probate, which addresses the immediate cash flow problem; and they go to the intended person regardless of the will.

Many people have policies not written in trust simply because nobody suggested it. Insurers can generally arrange it, frequently at no cost.

The trade-off: once in trust, the arrangement is harder to change, and the policy is no longer the policyholder's to redirect freely.

Pension death benefits

Rules vary enormously by scheme and by jurisdiction, and the general shapes recur.

Defined benefit schemes frequently pay a spouse's or dependant's pension, defined by scheme rules, with limited scope for nomination. Whether an unmarried partner qualifies varies, and some schemes require evidence of financial interdependence.

Defined contribution arrangements generally allow the fund to be paid to nominated beneficiaries, sometimes at the discretion of trustees who take the nomination into account without being bound by it.

That discretion is deliberate, since it frequently keeps the benefit outside the estate for tax purposes, and it means the nomination is guidance rather than a direction.

Keep it updated anyway. Trustees follow nominations in the overwhelming majority of cases.

Death in service benefits through an employer, commonly a multiple of salary. Frequently overlooked because people forget they have it.

Check with any current and former employer.

Making a claim

Find the policies. Documents, bank statements showing premiums, correspondence, and the employer.

Tracing services exist in several countries for lost policies and pensions, and they are worth using where documents cannot be found.

Notify promptly. Insurers generally require notification within a defined period.

Expect to provide the death certificate, the policy details, identification, and sometimes medical information.

Expect delay where the death was recent to the policy start, where the cause of death is under investigation, or where a non-disclosure question arises.

The reasons claims are declined

Worth knowing, because most are avoidable at the point of application.

Non-disclosure. The commonest reason. A medical condition, a lifestyle factor or an occupation not disclosed when the policy was taken out.

Insurers investigate, particularly for claims early in a policy's life, and a material non-disclosure can void the policy.

The lesson is at the application stage: disclose everything, even where it increases the premium. A cheaper policy that does not pay is worthless.

Suicide clauses. Many policies exclude death by suicide within a defined initial period, commonly one or two years. After that period, most pay.

Specific exclusions — dangerous activities, certain travel, war risks.

Lapsed policies, where premiums stopped being paid.

If a claim is declined, insurers have complaints procedures and most jurisdictions have an ombudsman or equivalent. Declined claims are overturned with some regularity.

The over-fifties and guaranteed acceptance policies

Heavily marketed and frequently poor value.

Typical features: no medical questions, guaranteed acceptance, a small sum assured, premiums payable indefinitely, and no payout in the first year or two other than a return of premiums.

The arithmetic frequently means that someone who lives long enough pays in more than the policy pays out, and cover ceases if premiums stop, with nothing returned.

They suit people who cannot obtain conventional cover. For anyone who can, ordinary term or whole-of-life cover is generally better value, and simply saving the premiums may be better still.

The practical checklist

List every policy and pension you have.

Check every beneficiary designation and update anything out of date.

Ask whether policies should be written in trust.

Tell your family what exists and where the documents are.

Check for death-in-service cover with current and former employers.

Review after any marriage, divorce, birth or death.

This is general information, not financial or legal advice. Rules on trusts, pension death benefits and taxation differ substantially by jurisdiction. Take advice on your specific arrangements.