Life Insurance Beneficiary: Who Gets What And How

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person passes away. When you purchase a life insurance policy, you can designate one or multiple beneficiaries to receive a death benefit in the event of your death. A beneficiary can be a person, a charity, a business, or a trust. It's important to keep your beneficiary designations up to date and to notify your beneficiaries to ensure they know how to file a claim when the time comes.

Who can be a life insurance beneficiary?

Almost anyone can be a life insurance beneficiary, including people, organisations, and trusts. Here are some common examples:

People

You can name a person as your beneficiary, such as your spouse, children, or other family members. You can also name a friend as your beneficiary, although the insurance company may ask what "insurable interest" your friend has in you, i.e., how they would suffer financially by your death.

Multiple People

You can name multiple people as beneficiaries, such as your children. If you name multiple beneficiaries, you must specify the benefit amount or percentage that each should receive, and these must add up to 100% in total.

Charitable Organisations

You can name a charitable organisation as your beneficiary. There are several ways to benefit a charity through your life insurance policy, including naming it as a beneficiary, making it the owner and beneficiary, adding a charitable-giving rider, or working with a community foundation.

Legal Entities

Your beneficiary can be a legal entity, such as your company.

Trusts

Trusts can be named as beneficiaries, and this is a common solution for leaving money to children. You can set up a trust for your children, and a trustee will then oversee and distribute the funds according to your wishes. This can also be a good option for beneficiaries with special needs, as it can help them avoid losing eligibility for certain government programs.

Your Estate

Although not recommended due to the lengthy probate process that can delay payment to your heirs, you can also name your estate as your beneficiary.

It is important to note that your state of residence or the provider of your benefits may restrict who you can name as a beneficiary. For example, some states require you to list your spouse as your primary beneficiary, receiving at least 50% of the benefit. Therefore, it is essential to research your state's laws before naming your beneficiary.

How to choose a life insurance beneficiary

Choosing a life insurance beneficiary is an important step in owning a life insurance policy. Here is a guide on how to choose a life insurance beneficiary:

Who can be a life insurance beneficiary?

Almost anyone can be a life insurance beneficiary, including people, organisations, and trusts. Here are some common examples of life insurance beneficiaries:

• A person, like your spouse.
• Multiple people, like your children.
• A charitable organisation.
• A legal entity, like your company.

Some insurers place limits on how many beneficiaries you can name. If your policy has a limit, be selective when compiling your list. The beneficiaries you choose when you purchase a policy must have an "insurable interest" in your life, meaning they will suffer more financially or otherwise by your death than they will gain.

Primary vs. contingent beneficiary

Primary life insurance beneficiaries are the first in line to receive the life insurance death benefit if you die. Contingent life insurance beneficiaries, sometimes called secondary beneficiaries, receive the death benefit if the primary beneficiary dies before you do.

Multiple beneficiaries

If you name multiple beneficiaries, you can choose how much of the payout each party receives. For example, you might allocate 50% to your spouse, 30% to your child, and 20% to a charity. No matter how you divide a life insurance payout among beneficiaries, the percentages must add up to 100%. If you don't list the percentages, the insurer may grant equal shares to each beneficiary.

Irrevocable vs. revocable beneficiaries

You cannot change an irrevocable life insurance beneficiary without the beneficiary's approval. For this reason, irrevocable designations are uncommon. However, they can be useful if you want to ensure that a specific person, such as your child, receives the benefit. In contrast, a revocable life insurance beneficiary can be changed, updated, or removed at any time.

Choosing a life insurance beneficiary

This decision isn't always a simple one. Start by asking yourself why you have life insurance in the first place:

• Who relies on you financially and would need help paying ongoing bills if you die?
• Who would need financial support to cover costs incurred by your death, such as funeral expenses?
• Who would you like to leave money to regardless of whether they rely on you, such as a charity or a trust for your children?

You can avoid simple mistakes when designating a life insurance beneficiary by being as specific as you can. Make sure to include any identifying factors, such as each beneficiary's full name, Social Security number, relationship to you, date of birth, and address, so the insurer can locate your beneficiaries quickly. Consult a legal professional to ensure you use the correct language.

Once you narrow down your options, ask yourself how much money each beneficiary would need and divide the death benefit accordingly.

How to change a life insurance beneficiary

Changing the beneficiary of your life insurance policy is a straightforward process, but it's important to remember to do it. Here's a step-by-step guide on how to change a life insurance beneficiary:

Who Can Change the Beneficiary?

Only the policyholder can change the beneficiary of a life insurance policy. The policyholder is the person who has taken out the insurance and decides who the beneficiary will be. In rare cases, someone with power of attorney can also change the beneficiary. This is a legal document that lets someone make financial, legal, or medical decisions on your behalf.

When to Change Your Beneficiary

It's important to review and update your life insurance beneficiaries regularly, especially after significant life events. This ensures that the right people are protected and that your wishes are carried out. Some situations that may prompt a change of beneficiary include:

• Marriage or divorce
• Birth or adoption of a child
• Death of a beneficiary
• Changes to your estate plan, such as the creation of trusts
• Moving to a different state, especially a community property state

How to Change Your Beneficiary

To change the beneficiary of your life insurance policy, follow these steps:

• Contact your insurance company: Get in touch with your insurance provider to request a change of beneficiary form. The process may vary depending on the insurance company.
• Fill out the form: Complete the change of beneficiary form accurately and in full. Provide the policyholder's name and the new beneficiary's name. You may also need to include the reason for the change. If the change is due to the previous beneficiary's death, you may need to provide a copy of their death certificate.
• Submit the form: Once the form is complete, submit it to your insurance company for approval. They will review it and inform you if the change has been approved.
• Inform your new beneficiary: Let your new beneficiary know about the policy and where to find the relevant documents if they need to file a claim.

Additional Considerations

When changing your life insurance beneficiary, there are a few other things to keep in mind:

• Number of beneficiaries: Most life insurance policies list one beneficiary, but some allow for multiple beneficiaries. You can name primary, secondary, and final beneficiaries to ensure that your death benefits go to the right person even if your primary beneficiary is no longer alive.
• Approval requirements: In most cases, you can change your beneficiary at any time without penalty. However, there are certain instances where you may need approval from the current beneficiary or another party. This includes situations where you've given someone power of attorney, you live in a community property state, or you've named an irrevocable beneficiary.
• Tax implications: Changing beneficiaries typically has no tax consequences. However, if you are the owner of the policy, the death benefit may be considered part of your estate for tax calculations. Consult with a financial advisor or tax specialist for more information.

How to notify your beneficiaries

It is important to notify your beneficiaries that they are listed on your life insurance policy. This is because life insurance companies do not always contact beneficiaries, and it is common for beneficiaries to be unaware that they are listed on a policy. Here are some steps you can take to ensure your beneficiaries are aware:

• Tell your beneficiaries about the policy and where to find it. Let them know where you keep the paperwork, how much the policy is worth, and the name and contact information for the insurance company.
• Keep your beneficiaries informed of any changes to the policy. For example, if you change the percentage of the payout each party receives, let them know.
• Keep a copy of your policy in a safe and secure place that your beneficiaries can access. You could keep a copy in your home and another at your lawyer's office.
• Reach out to your insurance company and ensure they have up-to-date contact information for your beneficiaries.
• If you have life insurance through your employer, they may keep your beneficiaries on file for all of your employee benefits. Check with your employer to make sure they have the correct information.
• If you have investments, retirement accounts, or life insurance through a financial professional, check with them to ensure they have your beneficiaries on file.
• If you have a will, make sure it is up to date and includes information about your life insurance policy. This can help ensure that your beneficiaries receive the payout without it being held up in probate court.
• If you are worried about making a mistake when notifying your beneficiaries, consult a financial professional or attorney to ensure your intentions will be carried out correctly.

It is also a good idea to review and update your beneficiaries after major life changes, such as getting married or divorced, having children, or if your beneficiary dies. This will ensure that the right people are protected and that your wishes are honoured.

How to file a claim as a beneficiary

The death of a loved one can be a traumatic experience, and dealing with legal matters during this time can be challenging. However, as a beneficiary, you must file a claim to ensure that you do not waste the policyholder's premiums. Here is a step-by-step guide on how to file a life insurance claim as a beneficiary:

Gather the Necessary Documents:

• Obtain a certified copy of the death certificate from the relevant local government agency, such as your local vital records office. This is required by insurance companies to verify the policyholder's death.
• Locate the life insurance policy documents, which contain important information such as the term, death benefit amount, and policyholder details. If you cannot find these documents, contact the insurance company or the decedent's financial advisor for assistance.
• Complete the claim form, also known as a "request for benefits" form. Provide pertinent information about the policyholder, including their policy number, date and time of death, cause of death, and your relationship to the policyholder.

Contact the Life Insurance Company:

Reach out to the insurance company or agent that issued the policy to notify them of the policyholder's death and file your claim. Having all the necessary documents ready will make this process smoother and less stressful.

Wait for the Insurer to Process the Claim:

• The insurance company will confirm that you are the designated beneficiary and verify the policyholder's death. They may ask for additional proof of your identity, such as a Social Security card or birth certificate.
• The time it takes to process a claim varies between insurance companies. Respond promptly to any requests for additional information to help expedite the process.

Choose Your Payout Option:

You may have several options for receiving the death benefit, depending on the insurance company and the type of plan. Common options include a lump-sum payment or an annuity. Consult a tax professional to understand the tax implications of each option.

Receive the Death Benefit Payout:

Once your claim is approved, the insurance company will release the death benefit according to your chosen payment method. Stay in communication with the insurer throughout the process to ensure a smooth transaction and address any delays.

It is important to note that there is no time limit for filing a death benefit claim. However, it is advisable to file the claim promptly to receive the financial support you need. Additionally, ensure that you are well-informed about your rights as a beneficiary, including your right to know the policy amount, how to file a claim, and how to appeal a denied claim.

Frequently asked questions