Life Insurance 101: Understanding Basc Beneficiaries And Their Rights

A life insurance beneficiary is a person or entity chosen by the policyholder to receive the death benefit from their life insurance policy when they pass away. The beneficiary can be a family member, friend, charitable organisation, or a trust, and the policyholder can select multiple beneficiaries, determining how much of the death benefit each will receive. This ensures that, in the event of the policyholder's death, their beneficiaries will be financially supported. While it is not mandatory to name a beneficiary, doing so provides direct financial support to loved ones and prevents the death benefit from becoming part of the policyholder's estate, which can delay the payout.

Who can be a beneficiary?

A beneficiary is the person or entity you select to receive the death benefit from your life insurance policy when you pass away. You can choose more than one beneficiary, and you can choose how much of the death benefit goes to each person or entity.

The beneficiary can be a family member, friend, charitable organisation, child, or the guardian of your children. Trusts can also be named as beneficiaries.

Some state laws may require you to name your spouse as your primary beneficiary, with them receiving at least 50% of the benefit. In some states, you may be able to name someone other than your spouse as a beneficiary if you have documented permission from your spouse to do so.

The nine community property states that say a spouse has a right to 50% of a life insurance death benefit are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

You can also name a religious institution as a beneficiary. The key is that the beneficiary chosen must have an insurable interest in the life of the insured. In other words, they would experience financial challenges or hardship if you were to pass away.

If you choose to name an underage child as the beneficiary of your life insurance policy, then a trustee must be named. The trustee manages the funds of the trust until the child reaches the age of majority (18 years in Ontario). However, if a child is designated as a beneficiary in Quebec, then the death benefit is paid directly to the parent(s) or legal guardian.

What happens if you don't name a beneficiary?

Not naming a life insurance beneficiary could cause issues for your loved ones after you pass away. If you don't name a beneficiary, the policy's death benefit becomes part of your estate, and your will governs how the executor distributes the money. If you don't have a will, the death benefit goes to a probate court. This process can be lengthy and complicated, and it may take years before your loved ones can access your assets.

In some states, money paid to your estate can be claimed by creditors. Therefore, it is almost always a good idea to name a beneficiary. Naming a beneficiary ensures that your death benefit can be paid quickly and that your wishes are carried out.

Most life insurance policies have a default order of payment if you do not name a beneficiary. For individual policies, the death benefit will be paid to the owner of the policy if they are different from the insured person and still alive; otherwise, it will be paid to the owner's estate. For group insurance policies, the order typically starts with your spouse, then your children, then your parents, and then your estate.

If there is no default order specified in your policy, the payout may be paid to your estate or held in probate.

What is a primary beneficiary?

A primary beneficiary is the first person or entity in line to receive benefits in a will, trust, retirement account, life insurance policy, or annuity upon the account holder's or grantor's death. An individual can name multiple primary beneficiaries and stipulate how distributions would be allocated. For example, a parent with a $100,000 life insurance policy can name their son and daughter as the primary beneficiaries, and decide to distribute the assets as a 60-40 split or a 50-50 split.

The primary beneficiary is different from a contingent beneficiary, who is second in line to receive benefits. The contingent beneficiary receives an inheritance if they outlive the primary beneficiary, refuse it, or can't be located. Both primary and contingent beneficiaries must be legally competent to accept the gift.

It is important to note that named beneficiaries of insurance policies and accounts like 401(k)s and Individual Retirement Accounts (IRAs) take precedence over those designated in a will. This means that assets in these accounts will go to the named beneficiary, even if the will states otherwise. Therefore, it is crucial to regularly review and update primary beneficiaries as life circumstances change.

What is a contingent beneficiary?

A contingent beneficiary, also known as a secondary beneficiary, is a person or entity that serves as a backup to the primary beneficiary or beneficiaries named on a life insurance policy. They are second in line to inherit your assets and will only receive the death benefit if the primary beneficiary is unavailable, unable to be located, or has passed away.

When you buy a life insurance policy, you will be asked to designate at least one primary beneficiary. It is also wise to name at least one contingent beneficiary. This is because, if all your primary beneficiaries have passed away when you die, your contingent beneficiaries will receive the payout. Just like with a primary beneficiary, you can name any person or organisation as a contingent beneficiary, and you may have one or several.

The number of beneficiaries you designate is entirely up to you. You can choose multiple contingent beneficiaries and set a percentage or amount of your payout for each to receive. However, it's important to remember that contingent beneficiaries only receive a payout if all primary beneficiaries are confirmed as deceased.

While primary beneficiaries are typically those closest to the policyholder, contingent beneficiaries might be more distant. However, they should still be individuals or organisations that the policyholder would trust with their payout.

How to change your beneficiary?

Changing the beneficiary on a life insurance policy is a straightforward process, but it can only be done by the policyholder or owner. The policyholder is the person who has taken out the insurance and has their name on the plan.

There are two types of beneficiaries: revocable and irrevocable. A revocable beneficiary can be changed at any time without their consent, but an irrevocable beneficiary cannot be removed or changed without their approval.

To change the beneficiary, the policyholder should contact their insurance company, who will provide the correct forms and outline any specific requirements. Generally, a change of beneficiary form will need to be filled out, including information such as the policyholder's name, the new beneficiary's name, and the reason for the change. In some cases, the policyholder may need to provide a copy of their death certificate if the beneficiary change is due to the previous beneficiary's death.

It is important to keep your life insurance beneficiaries up to date, especially after significant life changes such as marriage, divorce, or the birth or adoption of a child. This ensures that the death benefit payout goes to the intended recipient.

Frequently asked questions