Who Gets Your Life Insurance Payout?

A life insurance beneficiary is a person or entity designated by the policyholder to receive the death benefit once the policyholder passes away. The death benefit is the payout from the life insurance policy. The beneficiary can be a single person, multiple people, or a trust. Typically, beneficiaries are the policyholder's spouse, children, or other family members. However, it is the policyholder's decision, and they can choose anyone, including charitable organisations or legal entities.

Who can be a life insurance beneficiary?

A life insurance beneficiary is the person or entity you designate to receive your policy's death benefit when you pass away. You can choose to have one or multiple beneficiaries, and they can be family members, charitable organisations, or legal entities—it's entirely your decision.

When choosing beneficiaries, most people typically opt for a spouse, child, or charity as their primary beneficiary. If you have multiple beneficiaries, you will need to specify the benefit amount or percentage that each will receive.

If you have children under the age of 18, you can name them as primary or contingent beneficiaries. However, if you pass away while they are still minors, the proceeds may be sent to the legal guardian of the child's estate. To avoid this, you can set up a trust or custodial arrangement, which will allow the payout to be used for the child's benefit while they are still minors.

You can also name charities or organisations as beneficiaries. If you feel strongly about a particular nonprofit, you can name it as a primary or contingent beneficiary to receive all or a percentage of your assets or life insurance payout.

Your beneficiary can be a person, a charity, a trust, or your estate. Almost any person can be named as a beneficiary, but your state of residence or benefits provider may restrict who you can name. For example, in certain states, you may be required to list your spouse as your primary beneficiary.

How to choose a life insurance beneficiary?

Choosing a life insurance beneficiary is a significant and personal decision. A life insurance beneficiary is the individual or organisation that will receive the payout from your life insurance policy after your death. Here are some key factors to consider when deciding who to choose as your life insurance beneficiary:

Financial Dependence

Consider if anyone relies on you financially. This could be a spouse, children, ageing parents, or anyone else who is financially dependent on your income. By choosing them as your beneficiary, you can ensure they will continue to receive financial support after your passing.

Family Considerations

If you are married, have children or grandchildren, think about how the benefits can support their future. A life insurance payout can help provide for your family's financial needs and security in your absence.

Charitable Intentions

If you are passionate about a particular cause, you may want to consider leaving a legacy by naming a charity, organisation, or academic institution as your beneficiary. This can be an impactful way to make a lasting difference in an area that is important to you.

Business Relationships

If you have a business partner, consider how your death might impact your business. You may want to choose your business partner as your beneficiary to ensure the continuation and financial stability of your business.

Primary and Contingent Beneficiaries

It is important to understand the difference between primary and contingent beneficiaries. A primary beneficiary is your first choice to receive the payout from your policy. In the event that your primary beneficiary is unable to receive the benefit (due to their death or other circumstances), you can name a secondary or contingent beneficiary who will then be entitled to the payout.

Revocable vs Irrevocable Beneficiaries

When setting up a life insurance policy, you will also need to choose between revocable and irrevocable beneficiaries. A revocable beneficiary can be changed at any time without their knowledge or consent, offering flexibility if you anticipate changes in your relationships or circumstances. On the other hand, an irrevocable beneficiary cannot be changed without their agreement, and you cannot make certain changes to your policy (such as withdrawing money) without their consent.

Remember, there are no set rules for naming a life insurance beneficiary. The choice is entirely yours and should reflect your personal circumstances, future goals, and the legacy you wish to leave. It is important to review and update your beneficiary designations as your life changes (marriage, divorce, birth of children, etc.) to ensure that your wishes are carried out as intended.

What happens if there is no beneficiary?

A life insurance beneficiary is the individual or organisation who receives the death benefit payout if the policyholder passes away while their plan is in force. When you take out life insurance, you are generally required to name at least one beneficiary, although you can name multiple beneficiaries and designate what portion of the death benefit you would like each to receive.

If you die without naming a beneficiary for your life insurance, or if your designated beneficiary has died or is not eligible and you have not specified alternatives, it won't be clear who should receive the death benefit. This can cause a delay in the payout, which may not be distributed according to the policyholder's wishes.

If there is no beneficiary, the benefit is often paid out to the policyholder's estate. The probate process will then determine how the payout is allocated, which can cause it to be earmarked to pay down any remaining debts of the deceased before being distributed to heirs. This could leave heirs without the financial protection the life insurance holder intended.

The probate process can be lengthy and complicated, and it may take years before your loved ones can access your assets. It can also be costly, with court fees and legal costs reducing the death benefit payout.

To avoid probate, it is important to name a beneficiary or beneficiaries and keep your policy up to date.

What are the different types of beneficiaries?

When you buy a life insurance policy, you must choose a beneficiary or beneficiaries—those who will receive payment in the event of your death. There are different types of beneficiaries, and you can name more than one person or entity to receive the benefits.

Primary Beneficiary

The primary beneficiary is the person or entity that is chosen to receive the death benefit first. You can name more than one primary beneficiary on your policy and specify how you want the proceeds to be split, by establishing various percentages. For example, if you have two beneficiaries, you could designate a 60/40 split, or any other combination. Typically, primary beneficiaries are spouses, children, or other family members.

Secondary Beneficiary

The secondary beneficiary (also known as the contingent beneficiary) is the next in line to receive the proceeds of your policy should the primary beneficiary be unable to do so. For example, if the primary beneficiary dies before or at the same time as the insured person.

Tertiary Beneficiary

The tertiary beneficiary is the next in line to receive the proceeds of the policy if both the primary and secondary beneficiaries are unable to do so.

Other Beneficiaries

In addition to the above, beneficiaries can also be classified as revocable or irrevocable. Revocable beneficiaries can be changed at any time, whereas irrevocable beneficiaries cannot be changed except under special circumstances (e.g., if the beneficiary dies before the policy owner).

How to find out if you are a beneficiary?

If you believe you may be a beneficiary of a life insurance policy, there are several steps you can take to confirm your status. Here is a detailed and direct guide on how to find out if you are a beneficiary:

Communicate with the Policyholder

If possible, the best way to determine if you are a beneficiary is to speak directly with the policyholder. Open communication allows you to understand their life insurance coverage, your role as a beneficiary, and how to claim any benefits. It is ideal to have this conversation ahead of time so that you are prepared in the event of their passing.

Review Documents and Finances

If the policyholder has passed away and you were not informed of your beneficiary status, you may need to do some research. Review the deceased's personal documents, both physical and digital, for any indication of a life insurance policy. Look for the insurance policy itself, or any receipts, emails, or payment confirmations related to life insurance. Check their bank statements for premium payments or transfers from a life insurance company.

Contact the Insurance Company

If you have identified the insurance company, contact them directly and ask if you are listed as a beneficiary. Be prepared to provide proof of your identity and your relationship to the policyholder. You may also need to submit documentation, such as the policyholder's death certificate.

Use Online Resources and Tools

There are several online resources and tools available to help locate life insurance policies and beneficiaries. The National Association of Insurance Commissioners (NAIC) offers a Life Insurance Policy Locator Service, which can help potential beneficiaries find lost policies. You can also try similar services provided by the MIB Group and the National Association of Unclaimed Property Administrators. Additionally, your state's Department of Insurance (DOI) website may have a tool that allows you to search for policies using information about the deceased.

Contact the Deceased's Advisors

If you are unable to locate the necessary information, consider reaching out to the deceased's financial advisors, accountants, attorneys, or other professionals who may have knowledge of their life insurance policy.

Check with Family and Friends

Discuss with family members and close friends of the deceased, as they may have information about the policy or know of any beneficiaries named.

Contact the Deceased's Employer

If you believe the deceased may have had coverage through their employer, contact their former employer or labour union for more information.

Remember, it is important to take a gentle and compassionate approach when investigating your potential beneficiary status, especially when dealing with grieving family members or going through personal loss. By following these steps, you can determine if you are a beneficiary and take the necessary steps to claim any benefits to which you may be entitled.

Frequently asked questions