Beneficiary Change: Base Insurance

A life insurance beneficiary is the person or entity that receives the death benefit from your policy when you pass away. You can choose to have one or multiple beneficiaries, such as a spouse, child, charity, or trust. It is important to keep your beneficiary designations up to date, as life changes (e.g. marriage, children, divorce) may prompt you to change your beneficiaries. Changing the beneficiary on a life insurance policy is a straightforward process and can be done at any time by contacting your insurance company.

The two types of beneficiaries: primary and contingent

When it comes to estate planning, it is important to understand the difference between primary and contingent beneficiaries. This will ensure that your assets are distributed according to your wishes when you pass away.

Primary Beneficiaries

A primary beneficiary is the first person or entity in line to receive your assets after your death. You can name multiple primary beneficiaries and decide how the benefits will be split between them. For example, if you have two children, you can designate both as the primary beneficiaries of your life insurance policy, with each receiving 50% of the benefits. Alternatively, you can specify different percentages for each beneficiary.

Contingent Beneficiaries

A contingent beneficiary, also known as a secondary beneficiary, is the second in line to receive your assets. They will only inherit if the primary beneficiaries are deceased, unable to be located, or refuse to accept the inheritance. As with primary beneficiaries, you can name multiple contingent beneficiaries and specify how the benefits will be split between them.

Why You Need Both

It is a good idea to name both primary and contingent beneficiaries to account for unexpected life changes. If you do not, and your primary beneficiary is unable or unwilling to accept the inheritance, your assets may have to go through probate or a liquidation process, which can be costly and time-consuming for your loved ones.

Who Can Be a Beneficiary?

You can choose almost anyone to be a beneficiary, although there are some restrictions if the beneficiary is a minor. You can also name a charity or nonprofit organisation as a beneficiary, although there may be additional tax implications.

How to change a beneficiary

Changing the beneficiary of a life insurance policy is a straightforward process, but it can only be done by the policyholder. The policyholder is the only person who can make changes to the beneficiaries, with rare exceptions. For example, if you have granted someone power of attorney, a legal document that lets someone make financial, legal, or medical decisions on your behalf, they can change the beneficiaries.

To change a beneficiary, contact your insurance company. You will likely need to make the request in writing, and your insurer will provide the correct forms. You can also request a beneficiary change form from your life insurance company, enter the necessary information, and return it to them. The form will ask for personal information about your beneficiary, such as their full legal name, address, date of birth, phone number, and Social Security number.

You can change your beneficiary at any time, but there are two circumstances in which you will need another person's permission to update a beneficiary: if you live in a community property state and bought your policy after you got married, or if you named someone as an irrevocable beneficiary. In these cases, you will need your spouse's or the irrevocable beneficiary's approval, respectively, to make changes.

It is important to keep your beneficiary designations up to date, especially after major life changes such as marriage, divorce, the birth or adoption of a child, or the death of a beneficiary.

Who can change the beneficiary

Changing the beneficiary of 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 their name on the life insurance plan, and there should only be one policyholder per plan.

The policyholder can change their beneficiary at any time, but they will need to check the terms of their policy, as there are some instances where approval is needed to make changes. For example, if the policyholder has named an irrevocable beneficiary, they will need that beneficiary's consent to remove them or change their benefit allocation. Similarly, if the policyholder lives in a community property state and bought the policy after they got married, they will need their spouse's permission to name someone other than their spouse as the beneficiary.

If the policyholder has given someone power of attorney, a legal document that lets that person make financial, legal, or medical decisions on their behalf, that person can also change the beneficiary.

To change the beneficiary, the policyholder or their attorney should contact their insurance company. The insurance company will then provide the correct forms, which are usually completed online or in writing.

When to change a beneficiary

Life is full of changes, and it's important to keep your life insurance beneficiaries up to date to reflect this. There are several key moments when you should review and possibly change your beneficiary.

Marriage or divorce

If you get married or divorced, you may want to change your beneficiary. In the case of divorce, you may need to re-designate a beneficiary with an updated relationship status, such as from "spouse" to "ex-spouse", for the designation to remain in effect. If you get married, you may want to change your beneficiary to your new spouse, especially if you live in a community property state, where your spouse will need to waive their rights for you to designate someone else.

Birth or adoption of a child

If you have or adopt a child, you may want to change your beneficiary to them, or add them as a secondary beneficiary. If you are a single parent, this may be your first choice. However, if your child is a minor, you will need to choose an adult custodian or legal guardian to manage the benefits until they turn 18.

Death of a beneficiary

If your primary beneficiary passes away, you will need to change your beneficiary. You should also regularly review your policy and consider changing your beneficiary if a secondary beneficiary passes away.

New estate plan

If you create a new estate plan, you should review your beneficiary. This is especially important if you are now using trusts as part of your plan. You may want to create a trust for your beneficiary, especially if they are a minor or a long-term dependent, to ensure they receive the benefit when they need it.

Remarriage

If you get remarried, you may want to change your beneficiary to your new spouse, or add them as a secondary beneficiary.

Moving to a community property state

If you move to a community property state, you will need to get your spouse's permission if you plan to name someone else as your beneficiary.

Restrictions on who can be a beneficiary

While there are almost no rules restricting who you can pick as a beneficiary, there are some important considerations to keep in mind. Firstly, if you reside in a community property state, there are usually life insurance beneficiary rules requiring your spouse to waive their rights if you wish to designate someone else as a beneficiary. Secondly, it is recommended that the policy owner, insured person, and beneficiary are not all separate entities, as the IRS may view the proceeds as a gift from the policy owner to the beneficiary, resulting in potential tax implications.

Additionally, certain beneficiaries may face tax consequences when inheriting specific financial assets. For example, while the principal of most life insurance policies is not taxed, the accrued interest might be taxable for the beneficiary. It is also important to note that minors cannot directly receive the proceeds of a life insurance policy; instead, you can name a trust or their legal guardian as the beneficiary. Similar considerations apply to long-term dependents, such as family members with special needs, who may be disqualified from certain government assistance programs if they receive a large inheritance.

Overall, it is crucial to carefully research and understand the laws and potential implications of your state of residence before designating a beneficiary.

Frequently asked questions