Q

What is a life insurance beneficiary?

A

Your beneficiary is the person or organization designated to receive the death benefit if you die while your policy is active.

Zack Sigel 1600Anna Swartz 1600

Zack Sigel & Anna Swartz

Published September 20, 2019

KEY TAKEAWAYS

  • A life insurance beneficiary is the person or organization who recieves the payout from your policy should you die while it's active

  • Many people name their spouse, but you can also name a sibling, friend, busniness partner, charity or trust as your beneficiary

  • You can have multiple beneficiaries, and you'll also need "contingent" beneficiaries, who are back-ups in case your primary beenficiary cannot recieve the death benefit

If you have a life insurance policy, and you’ve been paying your premium , your insurer will pay out a death benefit when you die. But you won’t be the one to get the money (for obvious reasons). Instead, the benefit goes to someone who you designated with the insurance company, such as your spouse, children or a charity. That person or organization is called a beneficiary.

Your life insurance beneficiary can be a family member, a friend, a business partner, a charitable organization or a legal entity like a trust or your estate. While setting your life insurance beneficiary is your choice, some states have laws that regulate who you can and can’t name as a beneficiary.

You can also name multiple people as beneficiaries and choose to have the death benefit distributed among them. Read on to learn about the different types of beneficiaries, who can be a beneficiary, and the roles and responsibilities of a life insurance beneficiary.

In this article:

What does it mean to be a beneficiary?

Your life insurance beneficiary is the designated recipient of your death benefit should you die while your policy is active. As we mentioned above, you can name a spouse, child, friend, organization, charity or trust as your policy’s beneficiary — you can also name multiple beneficiaries.

When naming your beneficiaries, you’ll need some basic information about them, including their full names, birthdates and Social Security numbers. Remember, your beneficiaries will have to be identified after your death — you want to give as much information about them as possible to make sure it’s easy for them to receive the payout.

You’ll also need to choose multiple kinds of beneficiaries: your primary beneficiary, who is your first choice pick to receive your death benefit, and your contingent beneficiary, who gets the payout if the primary beneficiary can’t.

Primary vs. contingent beneficiaries

Your primary beneficiary is the original person or organization you designate with the insurer to receive the life insurance benefit when you die. Most people designate their spouse.

You can also name multiple beneficiaries and determine how much of a stake in the payout each one gets. You may want to designate a certain percentage to your spouse and a certain percentage to an adult child, or your business partner.

You’ll also want to choose some contingent beneficiaries. A contingent beneficiary is someone you elect to receive the death benefit if the primary beneficiary dies or, in the case of an organization or charity, goes out of business before you die.

Although the contingent beneficiary is named in the life insurance policy, they won’t receive a portion of the death benefit if any of the primary beneficiaries are still alive. The first contingent beneficiary you name is called the secondary beneficiary, the third is the tertiary beneficiary and so on.

Revocable vs. irrevocable beneficiaries

You’ll also need to designate your beneficiaries as revocable or irrevocable. A revocable beneficiary means you can remove them and name someone else at any point, with or without notifying them. This is a good option if you purchase life insurance while you’re single, but think you may have a spouse or partner someday. You can name a parent or sibling as a revocable beneficiary, and then if you get married down the line, it’s easy to switch your beneficiary to be your new spouse instead.

An irrevocable beneficiary is a beneficiary who cannot be removed from the policy without their consent. If you name your spouse as an irrevocable beneficiary, you can’t switch the beneficiary later unless you have your spouse’s consent.

Can anyone be your life insurance beneficiary?

Yes and no: You can choose anyone to be your life insurance beneficiary, but if you’re married, depending on your state’s laws, you may have to get your spouse’s consent before you name someone else as your beneficiary. Let’s take a look at some of your options when choosing a life insurance beneficiary:

Your spouse

Most people choose their spouse as their primary beneficiary. Life insurance is meant to protect your family from financial hardship after you’re gone, so by leaving money to your spouse, you ensure that they won’t struggle with paying the bills or for your kids’ college.

Additionally, these nine states have community property laws, meaning if you live in one of these states, you need your spouse’s consent if you want to name someone other than them as your beneficiary:

life-insurance-spouse-laws

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

These laws generally apply only if you got the policy after getting married. Alaska and Tennessee also have community property laws, but they are voluntary. You and your spouse have to opt in to them.

Your minor children

We don’t recommend naming your children as beneficiaries if they’re still minors. It’s very difficult to pay out such a large sum to a child without jumping through some legal hoops.

If you designate a minor as your beneficiary, the death benefit will go into a trust overseen by a court-appointed guardian. That guardian will hold onto the money until the child reaches what’s called the “age of majority.”

You can also designate a trust in the child’s name as the beneficiary, and the fiduciary in charge of the trust will pay out the benefit when the child becomes eligible.

This guide will provide more details on naming a child as a life insurance beneficiary.

Nonrelatives

You can designate a business partner or even just a friend as a beneficiary. Remember, your beneficiary can be anyone you want, with one exception: If you live in a community property state, you will need to get consent from your spouse in order to pay the benefit to someone else.

Organizations or charities

Your beneficiary doesn’t have to be a person. You can direct your life insurance policy to pay out to an organization, such as your business. Many people select an organization as their beneficiary if their family is already well-off. A sudden injection of cash can help any business manage the loss of an employee or owner.

You might also consider a charity or nonprofit. These organizations often operate with tight margins, and you can help further their mission even in death by naming one as a beneficiary of your life insurance policy.

A trust

Another way to leave an insurance benefit to your intended beneficiary is by having the insurance company pay out to a trust. The most common reason people use trusts is to make it easy for their kids to access life insurance proceeds.

Trusts are also useful because if you’re considering an unusual choice as your beneficiary, you might run into resistance from the insurer itself. In that case, you can name a trust as your beneficiary so that an appointed conservator can receive and disburse the money on your behalf.

People have even used trusts to effectively leave money for their pets. You could do that by naming someone to inherit the pet in your will, and then establishing a trust to pay for the pet’s care using the money from the insurer.

There are multiple types of trusts, like irrevocable and revocable living trusts, and you might not even need one depending on what assets you have and what’s in your will. Here’s a more thorough look at trusts versus wills.

policygeniusSymbolCenter

Policygenius is the easy way to compare life insurance.

"Policygenius… guides consumers to figure out what kind of insurance they need and offers them options."

– The Wall Street Journal

What happens to life insurance with no beneficiary?

If you don’t choose any primary beneficiaries, the insurance company will pay out your benefit to your estate. This can significantly slow down the disbursement of life insurance benefits because your benefits are subject to probate, which is when the courts determine who should get your assets. You may also have to pay tax on your life insurance benefit if it goes to your estate.

How to update your beneficiaries

Updating your life insurance beneficiary or beneficiaries is usually a relatively easy process. You can change your life insurance beneficiaries at any time by contacting your life insurance company. Common reasons to change beneficiaries include getting married, getting divorced, or if your original beneficiary dies.

How you actually update your life insurance beneficiaries will depend on which carrier you have your policy with. Some allow you to update beneficiaries online. Others require a phone call or for you to fill out a paper form that you either mail or fax to the life insurance company.

This table details how to update your beneficiaries with the companies that Policygenius works with. If your carrier isn’t listed here, contact them to find out to update your beneficiary.

Life insurance carrierHow to update beneficiaries
AIGOnline
Banner LifeOnline
BrighthousePaper form (mail or fax)
John HancockPaper form (mail or fax)
Liberty MutualPaper form (mail or fax)
Lincoln FinancialOnline
Mutual of OmahaPhone call
Pacific LifeOnline
PrincipalPaper form (mail or fax)
ProtectiveOnline
PrudentialOnline
SBLIPaper form (mail or fax)
TransamericaPaper form (mail or fax)

How are life insurance beneficiaries paid out?

Once a beneficiary finds the right paperwork and correctly submits the claim form, they will get paid the death benefit. This is the amount of insurance coverage you purchased. So if you had a $1 million policy, your beneficiary will receive $1 million (with rare exceptions).

There are two options for how to receive the money:

  • Lump sum. Your beneficiary can request the entire amount all at once. That’s useful if he or she has any immediate expenses to cover, like your funeral or mortgage payments. The best part is that it’s typically tax-free.

  • Installment or annuity. Your beneficiary can also request to receive the payments in monthly or annual installments. This might be beneficial if they think it’ll be easier to manage, or if they know their spending habits tend to be less than thrifty. Installments can be spread out across five to 40 years.

Can a life insurance beneficiary get denied the death benefit?

There are a couple of scenarios where the life insurance carrier may deny your beneficiary’s claim to the death benefit.

If your beneficiary murdered you to collect the cash, the insurer will (hopefully) reject his or her claim. Thanks to what’s called “the slayer rule,” most states won’t pay the benefit if there’s any evidence against the person trying to claim it.

The insurer may also deny your beneficiary if you die of a disease that you didn’t mention in your application or that was caused by something you didn’t mention. For example, if you die of esophageal cancer, but you failed to mention your smoking habit on the life insurance application, the insurance company could withhold the death benefit.

Similarly if the insurer finds out you died from a previously undisclosed risky hobby, the insurer could recalculate your premiums to the amount it believes you should have been paying and subtract that amount from the payout.

The last reason an insurance company might not pay out the death benefit is if you die from suicide within the first two years of taking out the life insurance policy. Virtually all policies have a “suicide clause” outlining the insurer’s guidelines for when the insured person takes their life. Usually, the insurer will refund the premiums the policyholder paid.

If you, or someone you know, is feeling hopeless, the National Suicide Prevention Lifeline is available 24/7 to talk. Please call them at 1-800-273-TALK (8255) or reach out to them online, for free, confidential support or resources for your loved ones.

Do beneficiaries pay taxes on life insurance policies?

The money a beneficiary receives from a life insurance payout isn’t considered taxable income, and it doesn’t need to be reported on their tax return. However, even though life insurance payouts are usually distributed tax-free, there are some situations in which a beneficiary will need to pay taxes on money related to the life insurance payout.

If the death benefit wasn’t paid out immediately following the policyholder’s death and accrued interest, the beneficiary may have to pay taxes on that interest. That’s also true if the beneficiary elected to receive the payout incrementally rather than as a lump sum.

If the life insurance payout went to the policyholder’s estate rather than a beneficiary, then the person who inherits the estate may have to pay estate taxes or inheritance taxes on the money, since its no longer viewed as a life insurance payout.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.