How the payout works

Who receives it

• A named personal beneficiary — the usual and preferable arrangement; the money is theirs to direct
• A lender, on older or lender-assigned policies — the balance is cleared and the family receives nothing further
• A trust, where one has been established for the purpose
• The estate, if no valid beneficiary is named — which generally means probate, delay, and exposure to creditors

Nobody has to pay off the mortgage

Where a personal beneficiary receives the money, there's no obligation to clear the loan. They can pay it off, keep making payments, or use the money for something more urgent.

Sometimes keeping a low-rate mortgage and holding the cash is the better decision. Preserving that choice is the main argument for naming a person rather than a lender.

Payment options

A lump sum is the default and the simplest. Insurers commonly also offer a retained-asset account they hold that pays interest, or instalment options.

The death benefit is generally not subject to income tax; interest paid on money the insurer holds generally is. That difference is worth understanding before electing anything other than a lump sum.

What tends to go wrong

• No beneficiary named, so the benefit goes through the estate
• An outdated beneficiary — an ex-spouse, or someone who has died
• A minor named directly, which usually requires a court-appointed guardian to receive funds
• The beneficiary not knowing the policy exists
• Designations updated in a will but never with the insurer, where the insurer's record generally controls

The five-minute fix

Check the beneficiary designation on every policy you hold, confirm the insurer has it recorded, and tell the people concerned that the policy exists and who to call.

That last part costs nothing and is the single most useful thing you can do for them.