As you know, you will be allowed to designate a beneficiary to receive your death benefit when you purchase a life insurance policy. In fact, when it comes to naming a beneficiary, your choice is almost limitless. Moreover, you can easily change your beneficiary in the event of a major life event, for instance having a child or getting divorced. The only exception. however, would be for minors. In this case, a trust or legal guardian would need to be designated as the beneficiary.
No matter who you name as your beneficiary, make sure to notify them that you’ve designated them as your life insurance beneficiary. Most importantly, you also should provide them with a copy of your policy. If they do not have this information, they may not be aware that a claim can be filed when it’s necessary.
The following section discusses the different types of beneficiaries, who to include on your life insurance policy, and how to ensure they receive the payout.
What is a Life Insurance Beneficiary?
Upon death, your beneficiary will receive the death benefit from your life insurance policy. As such, the choice of a beneficiary is therefore a crucial step when purchasing a life insurance policy. In fact, you probably bought life insurance so that your beneficiary will be taken care of financially if something happens to you.
Beneficiaries are those people or entities named for the death benefit in life insurance policy. Among them:
- A single individual
- Two or more individuals
- Trustees of trusts you set up
- A charitable organization
- Your estate
Without any beneficiary named, your estate receives the death benefit.
Note that state laws and insurance policy rules can actually limit or influence who gets the payout. With that being said, you may not have as much control as you think when it comes to selecting who gets the payout. So, always carefully read the fine print on your life insurance policy and find out how the company handles beneficiaries before making a decision.
Can Anyone Be Your Life Insurance Beneficiary?
Beneficiaries may be legal entities, organizations or individuals with a substantial interest in the policy’s proceeds. The most popular examples include:
- Your spouse
- A member of your family, like children, siblings, or parents
- Non-relatives whom you trust
- A business partner
If you wish, you can designate multiple beneficiaries. If so, each will receive a percentage from your death benefit. Beneficiaries should be named for both the primary and contingent (or secondary) beneficiaries. You may have contingent beneficiaries if your primary beneficiaries are unable to collect the death benefit.
In states where community property is permitted, there are some factors to consider when naming someone as your beneficiary, such as your child or trust.
The Two “Levels” of Beneficiaries
Choosing both “primary” and “contingent” beneficiaries can be beneficial to your life insurance policy. If your primary beneficiary can be found after your death, then they receive the death benefits. The death benefit goes to the contingent beneficiaries when the primary beneficiary is unable to be reached. Unless you find a primary or contingent beneficiary, the death benefit will be paid to your estate, notes the Insurance Information Institute.
The names of beneficiaries should be spelled out clearly, including their social security number. It will be easier for the life insurance company to find them, as well as making death benefit disputes less likely. For instance, a former spouse might be able to claim a death benefit if the policy mentions “wife” or “husband” without using specific names. “On the other hand, if you have named specific children, any later-born or adopted children will not receive the death benefit—unless you change the beneficiary designation to include them,” adds III.
If the beneficiaries are unable to be found, you should specify how the benefits will be distributed if they cannot be found. Let’s say that you have two children, and you name each one to receive half of the death benefit. Do you wish for the other child to receive the entire death benefit if one of your children dies before you do, or for the deceased child’s heirs to receive a share?
In the case of a death benefit going to your estate, probate proceedings could hinder distribution and lower the amount of money available to your heirs.
“Choosing beneficiaries, and keeping those choices up-to-date, is an important part of owning life insurance,” III advises. Your choice can change if you have a child, get married or divorced. Maintain your beneficiary designation so that you can keep your choice appropriate as new situations arise.
Choosing a Life Insurance Beneficiary
Insurers don’t have rules about who can be named as a beneficiary — aside from minors. Furthermore, you don’t need to include your life insurance beneficiaries in your will, although they can be the same.
Beneficiaries can be individuals, charities, businesses, or trusts. You can designate the beneficiary as a family member, child, spouse, friend, or anyone else that you know. There are even some agents who like to joke that a “secret lover” can be listed as a life insurance beneficiary.
There is no legal requirement that a policy owner, person insured, and beneficiary be separate entities. However, it’s recommended that you don’t. Several tax authorities may view any proceeds from a policy owner’s death as a gift to the beneficiary, making the proceeds taxable.
Additionally, it’s not suggested that you name a creditor as a beneficiary of your life insurance policy. Instead, designate the beneficiary as the person who will pay a debt. As the beneficiary, they have the option of using the death benefit to pay the mortgage or cover urgent financial obligations.
Naming your spouse as a beneficiary.
People usually designate their spouse as the primary beneficiary of their life insurance policy so the proceeds can help pay the bills or cover future expenses.
You must get your spouse’s consent in order to name someone other than them as your beneficiary in the following nine states with community property laws:
- New Mexico
Voluntary community property laws are in place in Alaska, Tennessee, and South Dakota. Community property laws require a spouse’s consent on named beneficiaries only if the policy goes into force after the couple gets married.
Naming your children as a beneficiary.
The idea of naming your children as beneficiaries on your life insurance policy seems logical. Just be aware that if you were to die when they’re minors, the money may not be deposited until the “age of majority,” which is generally at 18 years old. When your child needs the death benefit for immediate living expenses, like college tuition for the upcoming semesters, a delay can be extremely frustrating.
In order to prevent your children from waiting until they reach the age of majority to receive the death benefit, there are several ways to help:
- Appoint a guardian. A legal guardian can typically receive payments on behalf of a minor in many states. Prior to your death, you can name a guardian, or your guardian can apply for rights after your death. Legal guardianship of a child’s finances must be granted by the state either way. The process of appointing a guardian can be complicated and costly, so it is best to consult with an attorney before taking action.
- Establish a trust. Children can inherit money easily through trusts. The trustee can oversee funds and distribute the money as per your instructions if you set up a life insurance trust for your children. It’s important to note that there are costs involved with this option, as well as the fact that the trust has to be active when you die.
Naming extended family or friends as beneficiaries.
When it comes to choosing beneficiaries for their insurance, married people choose each other as beneficiaries. However, single people can name anyone associated with them, like a sibling or best friend.
A friend or partner with whom you are not married to can be a good choice. Unrelated beneficiaries may, however, be required to have a financial connection, such as a shared rent or living expenses. Those connections are called “insurable interests.”
Naming your estate as a beneficiary.
Generally, life insurance proceeds aren’t taxable. But if the policy payouts are left to heirs as part of a large inheritance, the payout may be subject to estate tax.
What if you have a will? Probate court can delay the payout and cost the estate money. By naming a beneficiary instead, the policy proceeds go directly to them without this delay or additional tax costs.
Choosing your estate as a beneficiary isn’t necessarily a bad idea. You just need to make sure that you fully consider the estate tax and inheritance implications if you go into this direction.
Naming your business as a beneficiary.
Business partners can name each other as beneficiaries, or you can name your business as your beneficiary. By doing so, your partner could buy out your share of the company in the event of your death. Or, your insurance proceeds could support the business until your heirs find a new owner.
Naming a charity as a beneficiary.
Choosing a charity as your beneficiary on your life insurance policy is also possible. When you die, you can “donate” your policy’s benefit to a cause or charitable organization that’s important to you..
What Happens to a Life Insurance With No Policy?
Typically, death benefits are issued to the estate of the insured if no beneficiary is named. There are instances, however, in which insurers distribute death benefits according to policy language. It’s important to know who’s first in line before leaving the beneficiary box blank, since this order can vary.
Community property states.
In a community property state, which considers you and your spouse equal owners of all your joint assets, your life insurance payout may automatically go to your spouse, regardless of whether you name a beneficiary. To prevent this from happening, the named beneficiary must receive written consent from your spouse.
Among the states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In Alaska, South Dakota, and Tennessee, married couples have the option of choosing to own their joint property equally. In this case, your spouse must give his or her consent to the beneficiaries named on your life insurance policy if you chose to adhere to community property laws when you got married.
How to Designate a Life Insurance a Life Insurance Beneficiary
On your life insurance beneficiary designation form, you should indicate the person or persons you want as your beneficiaries. This is a legal document and is used by the insurer to determine who will receive the death benefit and how much they will receive. You should make sure the listed beneficiaries are those you actually want to receive a benefit, since this designation overrides any other estate-planning documents you may have, such as a will.
Designating a beneficiary must be specific, otherwise, disputes can arise. Simply putting “husband/wife” would cause complications if you were to divorce and remarry. If you are listing a person as the beneficiary, you should provide the following details:
- Full name
- Address (street address, city, state, zip code, country)
- Phone number(s)
- Social Security Number
- Date of birth
Three options are available if you want to assign the death benefit to multiple beneficiaries:
- Specific Percentage. Death benefits are distributed according to the specific percentage assigned to each beneficiary.
- Per Stirpes. Death benefits are distributed equally among each member of the family.
- Per Capita. Each eligible beneficiary receives equally from the death benefit payout.
Although you can also assign a dollar amount to each beneficiary, this isn’t recommended. In most cases, insurance policies change in value over time. And you don’t want to leave some parts of the money unassigned.
The proceeds of the life insurance can also be paid out as a lump sum payment or as monthly payments. Typically, this method is used if your beneficiary is under the age of 18 or if you’re not confident that they can handle a large amount of money well.
How to designate a child or dependent as a life insurance beneficiary.
You may not be able to directly name a minor as a beneficiary of your life insurance policy if they’re under the age of 18. If so, one of the following options is available:
- Assign the beneficiary role to their legal guardian.
- Use the Uniform Transfers to Minors Act to designate a custodian for the proceeds. This individual is the beneficiary.
- Put the child in a trust and name the trust as beneficiary. The trust can specify when proceeds are to be released and how they’ll be used.
Whether or not the beneficiary of your estate is a minor, you may want to set up a trust for them as well, especially if they are a long-term dependency. Over $2,000 of an inheritance could disqualify someone from receiving Medicaid or SSI. The trust will handle payouts on behalf of your family members, so you don’t have to worry about this issue.
How is the Death Benefit Paid to Life Insurance Beneficiaries?
The beneficiary will receive their assigned death benefit directly into their bank account after submitting a life insurance claim. This can be done several ways, including:
- Lump sum. In one payment, the entire amount is received. These funds usually cover immediate expenses, such as funeral or mortgage payments. And, because they are also tax-free, this is a popular option.
- Installment or annuity. The benefit is paid in monthly or annual installments over a certain period of time. A person who wants to accrue interest on a death benefit and has no immediate financial obligations would benefit most from this option.
- Retained asset account. Benefits are held in a checking account by the insurer and can be withdrawn at any time. Any money left over earns interest which can be taxable.
If one beneficiary dies, then you can also pay his or her beneficiaries per stirpes or per capita. Per capita, in which those remaining beneficiaries receive a split that is equal for all, is the default and is easiest to understand.
An heir is entitled to the payout of a deceased beneficiary per stirpes. This option is best for those who want their insurance proceeds to benefit the beneficiaries’ family. An example of this would be grandparents covering their adult children and grandchildren.
Can a Life Insurance Beneficiary be Denied the Death Benefit?
Life insurance companies may not pay out the death benefit in certain circumstances. Although it is rare, here are the situations in which a policy doesn’t pay out if:
- On your application for life insurance, you provided inaccurate information
- Within the first two years of your policy, you committed suicide
- In order to claim your payout, the beneficiary murdered you
Providers may review your application if they suspect you withheld information to obtain a lower rate. This is especially true during the first two years of your policy, which is also known as the contestability period. Your beneficiaries will not receive the death benefit if they find out you were dishonest.
Insurance companies often refund people who paid previous premiums if they deny a claim for death.
Changing, Adding, and Removing Beneficiaries
Changes, additions, or removals of life insurance beneficiaries can usually be made at any time. The process varies from insurer to insurer. You may be required to sign a beneficiary form, with a witness, for some companies. For others you can simply update your beneficiary online.
When to change your life insurance beneficiary.
When life circumstances change, it’s crucial to reevaluate your beneficiaries to make sure the right people are covered. Below are a few situations when you might want to revisit your beneficiaries:
- After you get married, you want to make your new spouse a beneficiary.
- In the event of divorce, you might want to remove your ex-spouse from your policy and replace him or her with a child, trust, or close relative.
- You became a parent and want to add your children to your beneficiaries list.
- There is no longer a need to support your kids financially, so you have adjusted their percentages or assigned your spouse.
- In the event of your beneficiary’s death, you want to change or edit their designation.
It’s a good idea to teach your beneficiaries how to make a life insurance claim so they are prepared in case of your death. Beneficiaries might have to contact insurance companies directly because not all states require insurers to notify beneficiaries of death. In order to assist beneficiaries who find unclaimed policies, NAIC has a policy locator service.
How Beneficiaries Can Claim a Life Insurance Policy
When your beneficiary claims your life insurance policy, they will need to provide the following information:
- A copy of your death certificate — this can be obtained from either the funeral director or County Clerk’s office
- The actual life insurance policy — or least a copy
- The insurer’s claim form
- Death certificate for primary beneficiary (if contingent beneficiary)
Having multiple beneficiaries means that each must submit a separate claim to the insurance company.
You should ensure that every beneficiary has a copy of your life insurance policy and contact information for your insurer. Also, if your insurer has an online account, you may want to provide them with your records of premium payments. Your beneficiary and the insurer will have fewer chances of getting into a dispute over whether coverage was in effect at the time of your death.
A life insurance claim is reviewed by the insurer and the death benefit is paid, assuming there are no issues. It usually takes between a few days and several weeks for life insurance beneficiaries to receive their benefits.
Unclaimed life insurance policies can be found in a number of ways, but some are restricted by the state or the insurer. That means you could pay thousands of dollars in premiums without benefiting your loved ones by not notifying your beneficiaries appropriately.
Life Insurance Beneficiary FAQs
Who should be your life insurance beneficiary?
Ideally, your life insurance beneficiary should be someone who would experience financial challenges, like not being able to pay the mortgage, if you were to suddenly die.
Who should you never name as your life insurance beneficiary?
Don’t name your estate, minor child, or pet as beneficiaries of your life insurance policy. If you do, there may be a payout delay until the legal process is complete.
Can you name more than one beneficiary?
Yes. You can name multiple beneficiaries.
In cases where there are two beneficiaries listed on a policy, the death benefit is divided evenly between them, unless otherwise specified.
Do beneficiaries have to pay taxes on the death benefit?
Life insurance proceeds are generally tax-free if they are paid to your beneficiaries, but there are certain exceptions.
What if the primary beneficiary has predeceased the insured?
If the designated beneficiary dies before the insured, then the proceeds are usually paid to the contingent beneficiary. Payment would then be determined by the policy’s terms in the absence of a surviving contingent beneficiary. Be sure to review the policy’s terms. As long as the designated beneficiary survives the insured, the proceeds may be paid to the beneficiary’s estate if he or she passes away before the claim is made.