What Is a Life Insurance Beneficiary?
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A life insurance beneficiary is an individual or entity that receives the death benefit from a life insurance policy after the insured dies. A single policy may have multiple beneficiaries, such as spouses, children or a charity organization.
Designating a beneficiary is essential for ensuring the right people receive the death benefit and avoiding unnecessary taxation. Keep reading to learn more about how beneficiaries work.
Who Can Be a Life Insurance Beneficiary?
A life insurance beneficiary is often a family member, such as a spouse or child. You may also donate your life insurance proceeds to a charitable organization, which may carry certain tax advantages. Below are common types of beneficiaries:
- Spouse or domestic partner
- Your estate
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What Happens if You Don't Have a Life Insurance Beneficiary?
If you do not designate a beneficiary, the death benefit will typically go to your estate. Your estate is all the property you leave behind which is distributed according to your will and often through probate court. The probate process, which can span several months, may use your assets to settle debts before distributing them to your next of kin.
Designated beneficiaries are typically entitled to a relatively speedy and tax-free death benefit. When your death benefits go to your estate, it may be subject to an estate administration tax. Therefore, we recommend designating a specific beneficiary to help ensure a quick payout and avoid a taxable event.
Some life insurance policies will already have a system for paying out death benefits if there is no designated beneficiary. Death benefits issued by the Office of Personnel Management (OPM), for example, will be paid out in the following order:
- Your widow or widower
- Your children in equal shares
- Your parents in equal shares
- Your appointed executor or administrator of your estate
- Your next of kin under the laws of the state you live in when you die
Unclaimed Property Program
If the life insurance company cannot locate the beneficiary on file, your death benefits may be sent to the National Association of Unclaimed Property Administrators (NAUPA). Individuals can search their state database to see if they are entitled to an unclaimed life insurance death benefit. NAUPA receives tens of millions of inquiries annually and has returned more than $3,000,000,000 to the rightful owners of unclaimed property, including death benefits, refunds, annuities and more.
Primary vs. Contingent Life Insurance Beneficiary: What Is the Difference?
A primary beneficiary is the individual or entity that you want to receive the death benefits first, while a contingent beneficiary receives the death benefits only if the primary beneficiary has died, cannot be located or for some other qualified reason.
For example, you may designate your spouse as a primary beneficiary and your only child as a secondary beneficiary — if you and your family get into a car accident and only your child survives, then the life insurance proceeds will be issued to your child.
Life insurance beneficiary rules generally allow for multiple primary beneficiaries — they are called primary co-beneficiaries. For example, a parent may designate both of their children as primary co-beneficiaries, with each child receiving half of the proceeds.
How To Choose a Life Insurance Beneficiary
When buying a life insurance policy, choosing a life insurance beneficiary is generally part of the process. The insurer typically requests the below details to ensure that your death benefits go to the correct recipient:
- Full name
- Maiden or former names
- Social security number
- Date of birth
- Nationality and passport number (for non-U.S. citizens)
Keep in mind this will apply to all of your beneficiaries. Be sure to double-check all of your beneficiary's information to avoid issues with claim payouts after you die.
Some insurers will allow you to use a "per stirpes" designation, which means the death benefits will be issued to the named beneficiary's children if the named beneficiary is not alive, or to the grandchildren if the children are not alive and so on.
How To Change a Beneficiary
Updating your beneficiary is a generally straightforward task, and your insurance company will walk you through the process.
When changing a beneficiary, you will typically need to submit the proper paperwork and supply the new beneficiary's full name, social security number, date of birth and other identifying information — similar to designating a beneficiary the first time around.
Keep in mind that your life insurance company may request you designate your beneficiaries as revocable or irrevocable when buying the policy.
- Revocable beneficiary: You can change this type of beneficiary without notifying them and getting written permission.
- Irrevocable beneficiary: You must obtain written permission from this beneficiary to remove them from the policy before you can make changes.
Update Your Beneficiary After These Life Events
Common life events that may result in changing your beneficiary may include:
- Getting divorced
- Getting married
- Having children
- Paying your home mortgage early
- When a family member or dependent dies
- Parents become financially dependent on you
- Your children become financially independent
Failing to update your beneficiary can create trouble after you die. For example, say you married and listed your spouse as a life beneficiary but you later divorce and remarried. You may want to remove your ex-spouse and designate your current spouse as the primary beneficiary. Otherwise, your ex-spouse will likely be legally entitled to the death benefit after you die.
How Do Beneficiaries Claim a Life Insurance Policy?
After you die, the primary beneficiaries will need to obtain a certified copy of your death certificate and file a claim with the life insurance company. After confirming the insured's death, the insurance company will walk the beneficiary through the process of claiming the death benefit.
If there are multiple beneficiaries entitled to the death benefit, then each beneficiary will need to submit a claim. If a secondary beneficiary is claiming the death benefit because the primary beneficiary died, they will need to supply the death certificate of both the insured and the primary beneficiary.
If you are a primary beneficiary and want to ensure a timely death benefit payout, don't wait for the insurance company to contact you. It may be several months before the life insurance company realizes the insured has died and then contacts you.
Not sure if you're a beneficiary? Try searching the Life Insurance Policy Locator Service by the National Association of Insurance Commissioners. This free service may confirm your beneficiary status if the policy is with a participating company.
Choosing Your Death Benefit Payout
There are several ways you can receive the death benefit and it may already be decided in advance by the insured. Generally, the death benefit payout will come in three forms:
- Lump sum payment: You receive your share of the death benefit in a single payment.
- Annuity: The life insurance company keeps the death benefit and invests it. In exchange, you receive a steady stream of income payments that can potentially surpass the death benefit value if you survive long enough.
- Installment payments: Structure the death benefit payout in a series of payments over time — similar to a bi-monthly or monthly paycheck from a job.
The death benefit payout usually is not immediate. After filing a claim, it may take several weeks to a few months before you receive the payout.
Do Beneficiaries Pay Taxes on Life Insurance Policies?
When beneficiaries receive the death benefit in a life insurance policy, it is not counted toward your taxable income for that tax year. Therefore, designated beneficiaries may claim the full death benefit allotted to them without having to pay taxes on it.
What Happens When the Beneficiary Is a Minor?
In most cases, a minor will not be able to claim a death benefit before they reach age 18. Instead, the death benefit will likely go to one of the following:
- The surviving parent
- A guardian or court-appointed guardian
- An account held in trust payable to the minor upon reaching 18
The proper protocol for minors designated as primary beneficiaries will depend on your state's laws and life insurance company. Be sure to consult your insurance agent and a lawyer if you intend to designate a minor as a beneficiary.
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Pick the Right Life Insurance Policy
A life insurance policy can offer financial support to your loved ones after you die. The proceeds can go to funeral expenses, your child's education or paying down your home mortgage. SmartFinancial can help you find a life insurance policy that aligns with your budget and specific coverage needs. Enter your zip code below or call 855.214.2291 to receive your free life insurance quotes.