When somebody dies, their family is often left dealing with far more than grief.
There can be a funeral to arrange, bills to manage, banks to contact, a will to locate and an estate to administer.
Then there is another important question:
Did they have life insurance, and if they did, what happens to the money?
A life insurance policy may have been put in place specifically to protect a partner, children or other loved ones. The life insurance proceeds could be worth a significant amount and may have been intended to help with a mortgage, household expenses, debts or simply provide financial security.
But receiving those proceeds is not always as simple as finding a policy document and waiting for the money to arrive.
Who receives the payout can depend on how the insurance policy was set up, whether beneficiaries were nominated, whether the policy was placed into a life insurance trust, and the terms of the individual policy. MoneyHelper notes that life insurance proceeds may go directly to a nominated beneficiary, while in other circumstances they may form part of the deceased’s estate.
Understanding these differences can make an already difficult period a little easier.
What are life insurance proceeds?
Life insurance proceeds are the money paid following a successful claim under a life insurance policy.
The amount and circumstances in which a policy pays out depend on the type and terms of the individual policy. For example, term life insurance generally provides cover for a specified period, while whole-of-life insurance is intended to provide cover throughout the insured person’s life, subject to the policy terms and premiums being maintained.
For a family dealing with a death, however, the immediate questions are usually much more practical:
- • Is there a life insurance policy?
- • Which company provided it?
- • What is the policy number?
- • Who is entitled to receive the proceeds?
- • Is the policy held in trust?
- • Who are the trustees?
- • How is a claim made?
- • What documents will the insurer require?
Having these answers organised in advance can save loved ones from having to piece everything together at an already stressful time.
What is a life insurance trust?
A life insurance trust is an arrangement under which a life insurance policy is placed into trust for the benefit of specified people.
Trustees are appointed to manage the assets held within the trust for the beneficiaries. MoneyHelper describes a trustee as someone responsible for managing money or assets that have been set aside in trust for someone else’s benefit.
When a life insurance policy has been appropriately placed into trust, MoneyHelper explains that the payout can go to the people chosen without first having to pass through the probate process. It also notes that placing a policy in trust can affect how the payout is treated for Inheritance Tax purposes, although the precise implications depend on the circumstances and professional advice may be needed.
This can be an important distinction after somebody dies.
However, a trust only helps if the people involved know that it exists.
If a life insurance policy is in trust, what should loved ones know?
If somebody has told you that their life insurance policy is in trust, there are several pieces of information that may become important.
Ideally, you should be able to establish:
- • Which life insurance company holds the policy
- • The life insurance policy number
- • Whether the policy is definitely held in trust
- • Where the trust documentation is stored
- • Who the trustees are
- • Who the beneficiaries are
- • How the trustees can be contacted
- • Whether a financial adviser or solicitor was involved
- • Where any relevant correspondence is kept
Trust arrangements can differ considerably, so the terms of the actual trust documentation and policy need to be checked rather than assumptions being made.
HMRC guidance recognises that life assurance policies can be held in trust for the benefit of other people.
If you are a beneficiary but not a trustee, it may therefore be the trustees who need to deal directly with the insurance company.
What should you do when somebody dies and you find a life insurance policy?
Once a life insurance policy has been located, the first practical step is normally to contact the insurer.
Tell them that the insured person has died and ask what their claims process requires.
Different insurers and policies can have different requirements, so follow the specific instructions provided by the company.
You may need information such as:
- • The deceased person’s full name
- • Their date of birth
- • Their date of death
- • The life insurance policy number
- • Details from the death certificate
- • Your own identity and contact details
- • Information showing your relationship to the deceased or your authority to deal with the claim
If the policy is held in trust, the insurer may need to deal with the trustees.
If the proceeds are payable to the estate, the executor or administrator may instead need to become involved.
The key point is not to guess. Contact the insurance provider and establish how that particular policy works.
What happens if you know there was life insurance but cannot find the policy?
This can be particularly frustrating.
You may remember the person saying they had life insurance but have no idea which company provided it.
The Association of British Insurers recommends checking financial records such as bank or credit card statements for payments that might identify the insurer. It also provides information about services that can help people trace missing insurance policies.
Look for:
- • Direct debits
- • Standing orders
- • Old bank statements
- • Insurance correspondence
- • Emails
- • Financial adviser records
- • Mortgage paperwork
- • Employee benefit information
Someone may also have had life cover through their employer as a workplace benefit, sometimes referred to as death in service cover. MoneyHelper advises checking whether an employer provided this type of benefit.
This illustrates why keeping a record of all life insurance policies can be so valuable.
Loved ones should not have to search years of paperwork just to establish whether a policy exists.
Does a life insurance payout form part of the estate?
The answer depends on the insurance policy and how it was structured.
MoneyHelper states that in many cases, proceeds paid directly to a nominated beneficiary will not form part of the estate. If there is no nominated beneficiary, the proceeds might instead form part of the estate.
A policy placed in trust can also be treated differently, with the proceeds potentially being paid through the trust rather than through the estate.
This matters because the estate is responsible for dealing with matters such as assets, liabilities and the distribution of inheritance.
It can also have implications for Inheritance Tax.
Because individual circumstances vary, families should speak to the insurer and obtain appropriate legal, tax or financial advice where they are uncertain.
Can life insurance proceeds be used to pay a mortgage or other debts?
Life insurance is frequently taken out to provide financial protection where someone has dependants, a mortgage or other financial responsibilities. MoneyHelper specifically identifies dependants, mortgage or rent commitments and funeral costs as common reasons for considering life insurance.
Whether the proceeds must or can be used towards a particular debt depends on how the policy and debt have been arranged.
For example, MoneyHelper advises families dealing with an estate to check whether the deceased had insurance intended to cover a debt such as a mortgage. It also notes that proceeds which form part of an estate may be available towards outstanding estate debts.
The important thing is to understand the purpose and structure of the policy rather than simply assuming what the payout should be used for.
A simple note left by the policyholder explaining why they took out the policy can therefore be surprisingly useful.
What information should be kept with a life insurance policy?
Whether you have one life insurance policy or several life insurance policies, keeping a simple record can make an enormous difference to your family.
Consider recording:
Policy details
- • Insurance provider
- • Policy number
- • Type of policy
- • Name of the person insured
- • Approximate level of cover
- • Policy documents
Beneficiary details
- • Whether beneficiaries have been nominated
- • Who they are
- • Whether those details remain current
Trust information
If there is a life insurance trust, keep:
- • A copy of the trust documentation
- • Trustee names
- • Trustee contact details
- • Beneficiary information
- • Details of the solicitor or adviser involved
Professional contacts
Record details of anyone who may be able to help your family, including:
- • Financial adviser
- • Insurance broker
- • Solicitor
- • Accountant
A simple explanation
You may also want to leave a brief note explaining why the policy exists.
For example:
“This policy was taken out to help clear the mortgage.”
Or:
“This life insurance policy is intended to provide financial support for the children.”
You may understand exactly why you have a particular insurance policy.
Twenty years from now, your family may not.
Why life insurance information should not exist in isolation
A life insurance policy is rarely the only financial information a family needs after a death.
They may also need to locate:
- • A will
- • Property information
- • Mortgage documents
- • Bank accounts
- • Savings
- • Investments
- • Pensions
- • Business interests
- • Trusts
- • Debts
- • Solicitor details
- • Financial adviser details
- • Funeral wishes
The real challenge is often not that these things do not exist.
It is that nobody knows where they are.
Information might be spread between drawers, filing cabinets, email accounts, online portals, phones and conversations that happened years ago.
LegacyHub describes exactly this problem, noting that important information is often kept in people’s heads, on pieces of paper or scattered across different devices.
After a death, that can turn straightforward administration into a search for answers.
Make life insurance easier for your loved ones to deal with
The easiest time to organise a life insurance policy is while the policyholder is alive.
Make sure the appropriate people can eventually establish:
- That the policy exists.
- Which insurer provides it.
- What the policy number is.
- Whether there are beneficiaries.
- Whether the policy is in trust.
- Who the trustees are.
- Where the policy and trust documents are kept.
- Who to contact for professional help.
Nobody needs to be given unrestricted access to all of your personal financial information today.
They simply need a reliable way of finding the right information when the time comes.
Keep life insurance policies and important documents together with LegacyHub
This is where LegacyHub can help.
LegacyHub is a secure digital legacy vault designed to keep important files, wishes, personal messages and practical information organised and accessible to the people you choose when appropriate. Users can nominate trusted people to access their legacy when the time comes.
Your LegacyHub could help you organise information about:
- • Life insurance policies
- • Policy documents
- • Life insurance trusts
- • Trustee details
- • Mortgage information
- • Property
- • Pensions
- • Investments
- • Your will
- • Financial advisers
- • Solicitors
- • Important wishes and instructions
The objective is not to replace your insurer, solicitor, financial adviser or executor.
It is to make sure they, and your family, can find the information they need.
Because when somebody dies, the last thing their loved ones need is another mystery to solve.
A life insurance policy is only useful if the right people know about it
Life insurance is about protecting people.
But the policy document itself is only one piece of that protection.
Your loved ones also need to know the policy exists, understand who it is with and know whether there is a life insurance trust or other arrangement affecting how the life insurance proceeds are paid.
A few minutes spent organising those details now could save your family hours of uncertainty later.
And perhaps most importantly, it could help ensure that the financial protection you deliberately put in place actually reaches the people you intended it to help.
Keep your life insurance policies, trust information and other important documents organised with LegacyHub, so your loved ones know where to look when it matters most.
Frequently Asked Questions
What happens to life insurance after someone dies?
A claim normally needs to be made with the insurance provider. Who receives the life insurance proceeds depends on the policy and how it was set up. The money might be payable to a nominated beneficiary, trustees or the deceased person’s estate.
What are life insurance proceeds?
Life insurance proceeds are the money paid under a life insurance policy following a successful claim.
Does life insurance go through probate?
It can depend on how the policy has been structured. MoneyHelper explains that where a life insurance policy has been placed in trust, the payout can go to the chosen people without first going through probate.
What is a life insurance trust?
A life insurance trust is an arrangement under which a life insurance policy is held in trust for specified beneficiaries, with trustees responsible for managing the trust in accordance with its terms.
Can life insurance be subject to Inheritance Tax?
The tax treatment depends on how the policy is structured and the individual’s circumstances. HMRC guidance confirms that proceeds can form part of a deceased policyholder’s estate in certain circumstances, while placing a policy in trust can alter the position. Professional advice should be sought where Inheritance Tax is a concern.
How do I find a life insurance policy after somebody dies?
Check the deceased person’s paperwork, bank and credit card statements, emails and adviser records for evidence of an insurer. The Association of British Insurers also provides information about tracing missing policies.
What details should I record about my own life insurance policies?
At a minimum, consider recording the insurer, policy number, policy documents, relevant beneficiaries, whether the policy is in trust, trustee details and contact information for any adviser involved.
This article is for general information only and does not constitute financial, insurance, tax or legal advice. Life insurance policies and trust arrangements differ, and tax treatment depends on individual circumstances. Speak to your insurer and obtain appropriate professional advice where necessary.
