Life Insurance: Multiple Beneficiaries, Single Payout

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 death benefit is typically paid out to a beneficiary chosen by the policyholder, who can be a person or an organisation. However, it is possible to have multiple beneficiaries, in which case the policyholder must specify how much of the payout each beneficiary will receive. Each beneficiary will then need to file a separate claim for their portion of the death benefit and choose their preferred payout option.

Each beneficiary must file a claim for their payout portion

When a life insurance policyholder dies, their beneficiaries must file a claim with the insurer to receive the death benefit. If the policyholder has named multiple beneficiaries, each beneficiary must file a claim for their designated portion of the death benefit. The policyholder will have specified the percentage or dollar amount that each beneficiary is to receive.

The process for filing a claim is straightforward but requires the completion of some paperwork. The beneficiary must contact the insurance company as soon as possible after the insured's death and submit a certified copy of the death certificate, along with any other necessary documentation, such as a claim form. Although there is usually no deadline for filing a claim, it is advisable to do so promptly.

Once the beneficiary has submitted a claim with all the required documentation, the insurance company will review and approve it. The insurer will then issue the payout, typically within a month, although there may be delays in certain circumstances.

The policyowner designates a percentage or dollar amount for each beneficiary

When a policyholder designates multiple beneficiaries, they can choose to allocate a percentage or dollar amount for each beneficiary. This means that each beneficiary will receive a certain percentage of the death benefit or a fixed dollar amount. Each beneficiary will need to file a separate claim for their portion of the death benefit and choose their preferred payout option.

If the policyholder has named more than one beneficiary but has not specified the allocation, the death benefit will typically be divided equally among the beneficiaries. It is important to note that each beneficiary will need to submit their own claim forms and choose their preferred payout option.

In the case of contingent beneficiaries, if all primary beneficiaries have passed away, each contingent beneficiary will need to file a claim for the portion designated to them by the policyowner.

If there are multiple contingent beneficiaries, each must file a claim for their portion

When a policyholder passes away, their beneficiaries must file a claim with the insurance company to receive the death benefit. If there are multiple contingent beneficiaries, each must submit their own claim form to receive their portion of the death benefit.

The process for filing a life insurance claim is generally the same across different insurance companies. First, the beneficiary must contact the insurance company as soon as possible after the insured's death to initiate the claim process. They will need to provide a certified copy of the death certificate and any other documentation required by the insurance company, such as the policy number and personal information for the insured and beneficiaries. It is important to submit the claim and required documentation promptly to avoid any delays in the payout process.

Once the beneficiary has submitted the claim and all necessary documentation, the insurance company will review and approve the claim. After approval, the insurance company will issue the death benefit payout to the beneficiary according to their chosen payment option.

It is important to note that minor children cannot directly receive a payout from a life insurance policy. If minor children are named as beneficiaries, the policyholder should consider establishing a trust or appointing a legal guardian to manage the funds until the children reach the legal age.

The death benefit may be subject to lenders' claims before it goes to the policyholder's heirs

When a life insurance policyholder dies, their beneficiaries must file a claim with the insurance company to receive the death benefit. If there are multiple beneficiaries, each must file a claim for their payout portion.

If there are no living primary beneficiaries, the contingent beneficiary (if named) will receive the death benefit. However, if no primary or contingent beneficiaries are alive when the insured passes, the death benefit will be paid out to the insured's estate. This means it will go through the probate process and may be subject to claims from lenders before it is distributed to the insured's heirs.

Probate is a legal process in which a will is reviewed to determine its validity. This can cause delays in the payout process.

Death benefits from life insurance policies are generally not subject to ordinary income tax. However, if the benefit goes to the insured's estate, it may be subject to federal or state estate tax if the estate exceeds the exemption amount.

To avoid probate and potential delays, it is important to keep beneficiary designations up to date and to have multiple primary beneficiaries. This ensures that the death benefit is paid directly to the beneficiaries rather than passing through the insured's estate.

The beneficiary can choose their preferred payout option

The beneficiary of a life insurance policy can choose their preferred payout option, which is usually based on their needs and life situation. Here are some of the common payout options available:

• Lump-sum payment: This is the most common payout option. The beneficiary receives the entire death benefit in one single, usually tax-free payment. This option provides immediate access to the full amount, which can be crucial for covering significant expenses or debts.
• Installment payments: The beneficiary can choose to receive the death benefit in installments over a fixed period or for their lifetime. This option can provide a steady income stream, making financial planning easier. The installments can be set to a specific amount paid monthly, quarterly or annually until the proceeds are depleted. However, any interest earned on these payments may be taxable.
• Retained asset account (RAA): The insurer holds the death benefit in an interest-bearing account, and the beneficiary can withdraw funds as needed. This option offers flexibility and easy access to the funds while earning interest. However, the interest earned may be subject to taxes.
• Interest-only payout: The insurer keeps the death benefit and pays the beneficiary only the interest earned on the amount. The principal remains intact and can be passed on to other beneficiaries upon the original beneficiary's death. This option provides regular income but may come with taxable interest.
• Lifetime annuity: A lifetime annuity provides guaranteed payments to the beneficiary for the rest of their life. The amount is determined by the death benefit and the beneficiary's age. If the beneficiary dies before the death benefit is exhausted, the remaining amount typically reverts to the insurer.
• Fixed-period annuity: The death benefit is paid out over a specified period, such as 10 or 20 years. If the beneficiary dies before the end of this period, their designated beneficiaries can continue to receive the remaining payments. This method ensures a regular income for a set time frame.

The beneficiary can choose the payout option that best suits their financial needs and goals. It is important to consider the potential tax implications of each option and seek guidance from a financial advisor or tax professional.

Frequently asked questions