Life Insurance: Beneficiary Oids And What You Need To Know

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person passes away. The policyholder names a beneficiary, who is the person or entity that will receive the death benefit. While most beneficiaries are aware that they have been chosen by the policyholder, this is not always the case. In the event that a policyholder passes away without informing their beneficiary, the beneficiary will need to take steps to find out if they are a beneficiary and file a claim with the insurance company.

What is a life insurance beneficiary?

A life insurance beneficiary is the person or entity that the policyholder names to receive the death benefit. Once the policyholder passes, the death benefit must be distributed to the beneficiary. The policyholder can choose to name one specific person, a trust, or multiple people as contingent beneficiaries. Some common beneficiaries for life insurance plans include spouses, family members, business colleagues, charities, and trusts.

There are two main types of life insurance beneficiaries: primary and contingent. A primary beneficiary is the person or entity who is first in line to receive the death benefit payout after the policyholder's passing. The policyholder can name more than one primary beneficiary. A contingent beneficiary is a backup beneficiary who will receive the death benefit payout if the primary beneficiary passes away or cannot be found. The policyholder can also name multiple contingent beneficiaries.

It is essential to choose the right life insurance beneficiary. Policyholders may purchase life insurance to help their spouses cover mortgage payments, pay everyday bills, or fund their children's education. While there is no specific rule around naming a spouse as the beneficiary, it is important to remember that a life insurance policy is a legally binding contract.

If the policyholder does not name a beneficiary, it will be more difficult for their loved ones to receive the death benefit payout. The payout will either be paid to the policyholder's estate or held in probate, which may take years for loved ones to access. Therefore, it is crucial to name beneficiaries when purchasing a life insurance policy.

How to choose a life insurance beneficiary?

Choosing a life insurance beneficiary is an important step in owning a life insurance policy. Here are some key considerations to help you select the right beneficiary:

Understanding the Role of a Life Insurance Beneficiary

Know who a life insurance beneficiary is and their role. A life insurance beneficiary is a person or entity you choose to receive the death benefit from your life insurance policy when you pass away. This person or entity will receive the payout from your policy, so it's important to choose someone you want to provide financial support or benefit to after your death.

Identifying Your Dependents and Financial Goals

Ask yourself who relies on you financially and would need financial assistance after your death. This could include your spouse, children, or other family members. Consider your financial goals for getting life insurance, such as covering mortgage payments, paying off debts, or funding your children's education. Choose beneficiaries who align with these goals.

Understanding the Types of Beneficiaries

There are two main types of life insurance beneficiaries: primary and contingent. A primary beneficiary is your first choice to receive the death benefit when you pass away. A contingent beneficiary, or secondary beneficiary, will receive the death benefit if your primary beneficiary dies before you or cannot be found. You can name multiple beneficiaries and specify the percentage of the payout each will receive.

Selecting the Right Person or Entity

Choose beneficiaries who have an "insurable interest" in your life. This means they would suffer more financially or otherwise if you were to pass away. While there are almost no rules restricting your choice of beneficiary, minors have specific requirements. If you want to name a minor as a beneficiary, you will need to designate a trust or legal guardian to manage the funds on their behalf. Consider the tax implications of your choice, especially if you plan to name a creditor as a beneficiary.

Providing Necessary Information

When designating your beneficiary, be as specific as possible. Provide detailed information such as their full name, Social Security number, relationship to you, date of birth, and address. This helps the insurance company locate your beneficiaries quickly and avoid any disputes. Consult a legal professional to ensure you are using the correct language and meeting all requirements.

Regularly Reviewing and Updating Your Beneficiaries

Life insurance beneficiaries are not set in stone. You can typically change, add, or remove revocable beneficiaries at any time. Review your beneficiaries regularly, especially after major life changes such as marriage, divorce, the birth of children, or the death of a loved one. Ensure your beneficiary list reflects your current needs and preferences.

How does a life insurance beneficiary file a claim?

To file a life insurance claim as a beneficiary, there are a few steps you need to follow. Here is a detailed guide to help you through the process:

Collect Important Documents:

Firstly, you will need to gather the necessary documents, which typically include three essential papers:

• The certified death certificate: You can request a copy from the funeral home, medical professional, or local vital records office.
• The policy document: This includes details such as the policy number, death benefit amount, and beneficiary information. Contact the insurance company or the deceased's financial representative if you need help locating it.
• The claim form or "request for benefits" form: This is where you'll provide information about the policyholder, their policy number, and the cause of death. You'll also indicate your relationship to the policyholder and your preferred method of receiving the benefit.

Contact the Insurance Company:

Once you have your documents in order, reach out to the insurance company or agent that issued the policy. Notify them of the death and file your claim. Having all your documents ready will make this process smoother and less stressful.

Wait for the Claim to be Processed:

After filing your claim, the insurance company will perform some basic checks. They will confirm the policy's validity, the beneficiary's identity, and whether the policy was active at the time of the insured person's death. This process can take a few days to a few months, depending on the company and the specific circumstances.

Receive the Death Benefit:

There are a few ways you can choose to receive the death benefit, depending on the insurance company and the policy. The two most common options are a lump sum or an annuity. A lump sum payment provides the full benefit at once, while an annuity invests the benefit and pays it back in annual installments over several years. It's important to note that you may owe taxes on investment gains with the annuity option.

Additional Considerations:

It's worth noting that there is no time limit for filing a life insurance claim. However, the sooner you file, the sooner you'll receive the benefit. Additionally, if all the beneficiaries are deceased, the death benefit may be placed into a trust to address any debts owed by the decedent's estate. This scenario underscores the importance of listing contingent beneficiaries or multiple beneficiaries and updating the policy accordingly.

What is required to file a life insurance claim?

To file a life insurance claim, you'll need to follow a few steps and provide some important documents. Here's a detailed guide on what you need to do:

Step 1: Determine the Insurance Company

First, you need to identify which life insurance company holds the policy. This is crucial because a life insurance company doesn't automatically pay out a death benefit when a policyholder dies. Knowing the company will make the process of filing a claim much easier. If you're unsure, you can try the following:

• Review the deceased person's bank accounts and cancelled checks for payments to a life insurance company.
• Look through their records, including safety deposit boxes, for policies.
• Contact their previous employer to inquire about a group life insurance policy.
• Review income tax records for relevant information.
• Check with your state's Department of Insurance for assistance.
• Use the National Association of Insurance Commissioners' Life Insurance Policy Locator Service.

Step 2: Obtain a Death Certificate

The next step is to obtain a certified death certificate, which is required to file the claim. You can usually obtain this from a local health department, and the funeral home may also be able to assist you. It's recommended to get multiple certified copies, as you may need them for other purposes, such as closing accounts and utilities.

Step 3: Collect Important Documents

In addition to the death certificate, you'll need to gather a few other documents. These include:

• The policy document, which contains information such as the policy number, the amount of the death benefit, and the names of the beneficiaries. If you can't find this, contact the insurance company or the deceased's financial representatives.
• The claim form, also known as a "request for benefits," where you'll provide information about the policyholder, their policy number, and the cause of death. You'll also provide your relationship to the policyholder and your preferred method of receiving the death benefit.

Step 4: Contact the Insurance Company

Once you have all the necessary documents, it's time to contact the insurance company that issued the policy. Notify their claims department of the death and file your claim. You can often start this process online or by calling the company directly.

Step 5: Choose Your Payout Option

When filing your claim, you'll also need to decide how you'd like to receive the life insurance payout. There are a few common options to choose from:

• Lump Sum: You receive the entire death benefit in one payment. This option is generally tax-free.
• Specific Income: The insurer pays you the death benefit on a schedule over a certain time period. Any interest earned would be taxable.
• Life Income: This option provides you with a guaranteed income for life, with the amount depending on the death benefit, your age, and gender.
• Interest Income: The insurance company pays you interest on the policy, but the death benefit itself is not paid out. Instead, it goes to a secondary beneficiary upon your death.

Additional Considerations:

It's important to note that there is no time limit on filing a life insurance claim. As long as the policy was active when the policyholder died, you can collect the death benefit at any time. However, it's advisable to file the claim as soon as possible to expedite the process and receive the payout sooner.

How long does it take for a life insurance claim to be paid out?

There is no time limit for beneficiaries to file a life insurance claim. However, the process can take anywhere from 14 to 60 days, depending on various factors.

Life insurance companies are keen to ensure that benefits are paid out quickly, and as long as the required paperwork is in order and the policy isn't being contested, a claim can often be paid within 30 days of the death of the insured. However, each claim is different, and there may be state regulations that require additional processing time.

The payout process involves several steps. The company locates the policy and evaluates that it is still in force and in good standing. They will also evaluate the claim to ensure it is not fraudulent and investigate the cause of death to ensure it was not due to an excluded cause. The company will also verify that all the proper documentation has been provided and that state laws are followed.

The time taken to pay a death claim depends on factors such as the company's processing procedures and how quickly the necessary claim documents are received. While every state has separate rules regarding the maximum time a company can take to process a death claim, insurers will usually work to pay a claim sooner, as long as they have everything they need.

There are certain actions beneficiaries can take to help avoid delays. Firstly, they should provide proof of death by way of a death certificate. It's important to note that every life insurance company requires an original death certificate, not a copy. If multiple policies are involved, the beneficiary will need to request several original copies for each insurer. Secondly, beneficiaries should notify the life insurance company and file a claim as soon as possible. Most companies have designated claims specialists who can guide beneficiaries through the process and answer any questions.

The first two years after a policy is issued is known as the contestability period. If a claim is filed during this time, the insurance company has the right to review the medical records of the deceased to ensure that no misrepresentations or inaccuracies were made on the insurance application. There can be several situations that result in the later payment of a life insurance claim, but most delays can be attributed to incomplete information and improper documentation at the time of the claim.

Frequently asked questions