In many cases, people will take out a life insurance policy in order to provide for their family in the event of their death.
Many of these life insurance policies relate to young couples, who may have one or two young dependent children and a large mortgage on the family home.
When taking out these life insurance policies, be aware that the beneficiary of the policy can be your spouse or partner or, if no beneficiary is nominated, then it would ultimately be paid to the estate.
Therefore, if the owner of a life insurance policy has nominated a beneficiary, then that nomination takes precedence over the terms of any will made by that person. In those cases, the proceeds from the life policy do not form part of that person’s estate, provided the beneficiary is not the estate.
In circumstances where a deceased person is a bankrupt, the provisions of the Commonwealth Life Insurance Act 1995 provide protection for the proceeds of the policy.
Section 205 of that Act protects money payable on a person’s death to the person’s estate under a policy effected on that person’s life.
The purpose of this particular provision is to make sure there is something left over for the deceased’s family.
If a life insurance policy is paid to a person’s estate, the only debts which can be extinguished by the proceeds of the life policy are funeral and testamentary expenses - that is, debts which are incurred after a person dies.
Insofar as debts which have been incurred by a deceased person prior to their death, then the proceeds of the life insurance are not available unless there is a specific direction in that person’s will, which would make that money available to creditors.
Therefore, whenever you have a situation where there is a policy of life insurance and a person who may become, or is a bankrupt, it is extremely important to review that person’s will to ensure that the directions contained in it do not undo the protection afforded by the Life Insurance Act.