Beneficiaries' Share: Understanding Life Insurance Payouts

Life insurance is a crucial financial safety net for loved ones, but many are unprepared to receive death benefits when a family member passes away. When someone buys a policy, they should make it easy for the insurance company to identify beneficiaries by providing full names and other identifying information. Beneficiaries can be designated as revocable or irrevocable, with revocable beneficiaries being easier to change or remove. If a beneficiary is not designated, the death benefit becomes part of the estate and may be claimed by creditors. When designating multiple beneficiaries, the policyholder can decide how to split the payout, but the percentages must add up to 100%. It is important to consult a tax professional about potential tax consequences and regularly review beneficiaries to ensure they are up to date.

Naming beneficiaries

Who Can Be Named as a Beneficiary?

You can name anyone as a beneficiary, including family members such as a spouse, partner, parents, siblings, or children. However, minors may have certain restrictions, as outlined by state laws. In some states, minors can only list specific individuals, such as parents, grandparents, siblings, or legal guardians, as beneficiaries. It is essential to review the regulations in your state before naming a minor as a beneficiary. Additionally, you can also name entities such as charities, family trusts, or businesses as beneficiaries.

Providing Beneficiary Information:

When designating beneficiaries, it is crucial to provide detailed and accurate information. Include the full name, correctly spelled, along with any middle names or initials. If the beneficiary is not a U.S. citizen, their nationality and passport number should also be specified. This information helps the insurance company identify and locate the beneficiaries when it is time to pay out the death benefits.

Multiple Beneficiaries and Payout Splits:

You can name multiple beneficiaries, both primary and contingent, on your life insurance policy. If you have multiple beneficiaries, you must decide how you want the payout to be split between them. You can specify the percentage of the payout each beneficiary will receive, ensuring the percentages add up to 100%. For example, you could allocate 50% to your spouse, 30% to your child, and 20% to a charity. If you do not specify the percentages, the insurer may grant equal shares to each beneficiary.

Revocable vs. Irrevocable Beneficiaries:

When naming beneficiaries, you can designate them as either revocable or irrevocable. Revocable beneficiaries can be changed, added, or removed relatively easily, without the need for their consent. On the other hand, irrevocable beneficiaries cannot be modified without the beneficiary's approval, making it challenging to remove them or change their share. Therefore, it is important to review and update your beneficiaries after significant life changes, such as marriage, divorce, or the birth of a child.

Communicating with Beneficiaries:

It is essential to communicate with your beneficiaries and provide them with the necessary information. Inform them that they are beneficiaries and share the name of the life insurance company holding the policy. Additionally, consider placing a current copy of the policy with your will or other estate paperwork in a secure location that your beneficiaries can access. This open communication will help ensure that your beneficiaries are prepared and can receive the death benefit without unnecessary delays.

How much beneficiaries receive

When a person with a life insurance policy dies, their beneficiaries will receive a death benefit. This is a lump sum or other form of payment that gets paid out to the beneficiaries. The amount received by each beneficiary depends on several factors.

Firstly, the policyholder can designate beneficiaries as either revocable or irrevocable. Revocable beneficiaries can be changed, added, or removed easily at any time, without the beneficiary's permission (unless it is a spouse and the couple lives in a community property state). In contrast, irrevocable beneficiaries cannot be changed without the beneficiary's consent and are therefore less common.

Secondly, the number of beneficiaries and the percentage of the payout they each receive is determined by the policyholder. The policyholder can name multiple primary and contingent beneficiaries and decide how much of the payout each party receives. For example, a policyholder might allocate 50% to their spouse, 30% to their child, and 20% to a charity. The percentages chosen must add up to 100%. If the policyholder does not specify the percentages, the insurer may grant equal shares to each beneficiary.

It is important to note that minors cannot be named as beneficiaries in some states. Instead, the policyholder can name a guardian as the contingent beneficiary for the benefit of the minor. Additionally, the policyholder should ensure that each beneficiary can be easily identified by the life insurance company. Providing full names, nationalities (if non-US citizens), and passport numbers can help facilitate the identification process.

Death benefits

It is important to note that the policyholder has the flexibility to designate beneficiaries as either revocable or irrevocable. Revocable beneficiaries can be changed, added, or removed easily without requiring their consent. On the other hand, irrevocable beneficiaries cannot be modified without the beneficiary's approval, making it challenging to remove them or change their share.

When setting up a life insurance policy, the policyholder has the option to name multiple beneficiaries, including primary and contingent beneficiaries. The primary beneficiary is the first in line to receive the death benefit, while the contingent beneficiary is designated to receive the payout if the primary beneficiary is unable to or passes away simultaneously with the insured.

The policyholder has the discretion to determine the share of the death benefit that each beneficiary will receive. For instance, if there are three beneficiaries, the policyholder can allocate specific percentages, such as 50% to one beneficiary and 25% each to the other two. However, if the policyholder does not specify the percentages, the insurer may distribute equal shares to each beneficiary.

To ensure a smooth payout process, it is essential for the policyholder to provide comprehensive information about the beneficiaries, including their full names, addresses, dates of birth, and relationships to the policyholder. Additionally, it is advisable to place a current copy of the policy with the will or other estate paperwork, making it easily accessible to the beneficiaries.

Minor beneficiaries

When you purchase a life insurance policy, you can choose your child or children as beneficiaries who will receive the payout when you pass away. However, there are some legal implications when naming a minor beneficiary. Minor children may not be able to access your assets or life insurance proceeds until they reach the legal age of consent.

To avoid the legal implications of naming a minor as your beneficiary, you could instead name your spouse, partner, or other potential caregivers as the primary beneficiary. This way, they can continue to handle your household finances and save money for your child’s future. If something happens to you, the death benefit can be used by those who will be caring for your children as they see fit.

If you still want to name your minor child as a beneficiary, you can do so by establishing a trust under their name and appointing a trustee to manage the funds until the minor reaches adulthood. This is known as a life insurance trust, a legal entity that holds assets that are managed and distributed by a designated trustee. You can choose the trustee—a trusted relative, partner, friend, legal representative, or other adult—and set the terms for managing the funds on behalf of your child until they turn 18 or 21, depending on your state.

Another option is to create a Uniform Transfers to Minors Act (UTMA) account, which allows you to name a custodian to manage your child's assets until they become an adult. Once they reach adulthood, the assets will be transferred to your adult child, who may use the funds in any way they choose.

Changing beneficiaries

Choosing a beneficiary is an important part of owning a life insurance policy. A beneficiary is the person or entity that you legally designate to receive the benefits from your financial products. For life insurance, this is the death benefit your policy will pay if you die.

There are two types of beneficiaries: primary and contingent. A primary beneficiary is the person (or persons) first in line to receive the death benefit from your life insurance policy. Typically, this is your spouse, children, or other family members. A contingent beneficiary is someone who could step in to handle your life insurance benefits if your primary beneficiary isn't around.

You can change the beneficiaries named on a life insurance policy or other financial account at any time. Changing beneficiaries is usually easy to do, but it's important to remember to do it. Contact your employer, financial professional, or financial services company to learn how. An easy way to remember to keep your beneficiaries up to date is to use your employer's annual benefits enrollment to revisit the details of your accounts and insurance policies. You should review your beneficiary information at least once a year to ensure everything is current.

If you have benefits through your employer, use your employer's annual benefits enrollment to revisit the details of your accounts and insurance policies. If you don't have benefits through your employer, set a date you will remember each year (e.g., your birthday) and spend ten minutes checking your accounts and policies.

In some circumstances, such as specific divorce terms or if you made an "irrevocable designation," you may not be able to change or name a new beneficiary without getting your current beneficiary's consent. Similarly, if you have transferred ownership of an account or life insurance policy to someone else, you are no longer the owner, so you cannot change the beneficiary. Generally, you, your financial professional, or your attorney will know if any of these cases apply to you.

If you have a VA Life Insurance policy, the fastest and easiest way to update your beneficiary is through the Online Policy Access website. After creating an online account and logging in, you can update your beneficiary information online. You may also download and complete a form and mail it to the relevant address.

If you are a Servicemember with full-time SGLI coverage, you can make fast and easy changes to your beneficiary information at any time without completing a paper form or making a trip to your personnel office. To access this information, sign into the relevant website and go to the Benefits Tab, Life Insurance SOES- SGLI Online Enrollment System. If you are in the Public Health Service or any uniformed service with part-time SGLI coverage, use the SGLV 8286 form to make SGLI coverage and beneficiary changes, and submit your completed form to your branch of service personnel office.

Frequently asked questions