If you have a life insurance policy and you’ve been paying your premiums, your insurer will pay out a death benefit when you die. The person or organization collecting your death benefit is your life insurance policy’s beneficiary.

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

Read on to learn about the different types of beneficiaries, who qualifies to get the death benefit, and how to ensure that they actually get the life insurance payout.

KEY TAKEAWAYS

  • You can only name someone with insurable interest as your life insurance beneficiary, which means that they will financially suffer in the event of your death

  • Naming a secondary beneficiary is an important safeguard in case your primary beneficiary cannot accept the death benefit

  • Updating your beneficiary with every big life event ensures the life insurance payout doesn’t go to your estate or the wrong person

Can anyone be your life insurance beneficiary?

For the most part, you can choose anyone with insurable interest 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.

Naming a spouse as the beneficiary

Most people choose their spouse as their primary beneficiary to pay the bills or cover future expenses like your kids’ college tuition.

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

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

These laws only apply if your policy goes in force after getting married. Alaska and Tennessee also have community property laws that are voluntary.

Naming minor children as the beneficiary

We don’t recommend naming your children as beneficiaries if they’re still minors because 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, the death benefit will go into a trust overseen by a court-appointed guardian — the process can lock up the funds for years. The court-appointed guardian will hold onto the money until the child reaches what’s called the “age of majority,” or the year a child legally becomes an adult.

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.

Naming nonrelatives as the beneficiary

Nonrelatives can be listed as your policy’s beneficiary if you can prove that there is an insurable interest. This could be a trusted guardian who would take care of your children if you died or a roommate who would need to cover your portion of the bills and rent.

Naming an organization or charity as the beneficiary

If your family doesn’t rely on you financially, your life insurance beneficiary doesn’t have to be a person. Your policy can pay out to an organization, such as your business. A sudden injection of cash can help any business manage the loss of an owner.

Another option is listing a charity or nonprofit as the beneficiary. These organizations often operate with tight margins, and you can help further their mission even in death by naming one as a payee of your life insurance policy.

Naming a trust as the beneficiary

The most common reason people list a trust as their life insurance beneficiary is to make it easier for their kids to access life insurance proceeds or if you’re considering an unusual choice as your beneficiary, like your pet. When naming a trust as your beneficiary, an appointed conservator would receive the death benefit and disburse the money on your behalf.

By naming someone to inherit your pet or be the legal guardian of your child in your will, establishing a trust to get the money from the insurer can be used for your intended beneficiary’s care.

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. A certified financial planner can help you determine what your estate planning needs are.

→Here’s a more thorough look at trusts versus wills.

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What happens to life insurance with no beneficiary?

If you don’t choose any primary beneficiaries (or if they predecease you), 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. Your family may also have to pay tax on your life insurance benefit if it goes to your estate.

Who can change the beneficiary on a life insurance policy?

The policyholder is the only person who can make changes to the beneficiary designation. A beneficiary change can occur at any time by contacting your life insurance company. Some allow you to make these updates in your online portal, while others require a phone call or for you to fill out a paper change of beneficiary form that you either mail or fax to the life insurance company. Common reasons to do this include getting married, getting divorced, or if your beneficiary dies.

During the outbreak of COVID-19, some procedures around mailing or faxing forms to the insurer may have changed. Contact your life insurance company directly with any questions.

How are life insurance beneficiaries paid out?

Once your beneficiary finds the right paperwork and correctly submits the claim form, they will receive the death benefit amount equivalent to the amount of insurance coverage you purchased directly in their bank account. So if you had a $1 million policy, they will receive $1 million (with rare exceptions).

There are two ways to get the money:

  • Lump sum - The entire amount is paid out all at once. Most people choose this option because it is typically tax-free and can cover immediate expenses, like your funeral or mortgage payments.

  • Installment or annuity - The benefit is distributed in monthly or annual installments across five to 40 years. This option makes the payout easier to manage but can accrue interest.

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Can a life insurance beneficiary get denied the death benefit?

There are a couple of scenarios where the life insurance company may not pay out the death benefit.

If your beneficiary murdered you to collect the cash, the insurer will reject their claim due to “the slayer rule.” States won’t pay the death benefit if there’s evidence against the person trying to claim it.

The insurer may also deny a claim if you die of a disease or habit that you didn’t mention during underwriting. For example, if you die of esophageal cancer, but you failed to mention your smoking habit on the life insurance application, the life insurance company could withhold the death benefit. If the insurer finds out you died from a previously undisclosed risky hobby, they could deduct a sum from the death benefit to account for the recalculated premiums that you should have been paying all along.

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 received from a life insurance payout isn’t considered taxable income, and it doesn’t need to be reported on a 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.

The payee may have to pay taxes on the death benefit of a cash value life insurance policy if the death benefit wasn’t paid out immediately following the policyholder’s death and the cash value accrued interest. This all applies if your beneficiary elects to receive the payout in an annuity rather than as a lump sum.

If the life insurance payout goes to the policyholder’s estate rather than a specific beneficiary, the person who inherits the estate may pay estate taxes or inheritance taxes on the money.

Your life insurance beneficiaries are likely the reason you’re purchasing your coverage, which makes it all the more important to make sure that they actually receive the death benefit. By updating your policy regularly, leaving behind written details about your life insurance policy and how to spend the life insurance money, and consulting with a certified financial planner about how to best designate the death benefit, you can safeguard their financial security.

Life insurance beneficiary FAQs

Who should be your life insurance beneficiary?

Your life insurance beneficiary should be someone that has an insurable interest in receiving the life insurance payout, which means they’d suffer financially if you died.

What happens when the beneficiary of a life insurance policy is deceased?

If the beneficiary of a life insurance policy is deceased and cannot accept the death benefit, the funds go to the policy’s contingent beneficiaries. If there are no contingent beneficiaries to accept the death benefit, it is paid out to your estate.

What happens when there are two beneficiaries on a life insurance policy?

If there are two beneficiaries listed on a life insurance policy, the death benefit is distributed amongst them evenly, unless otherwise noted. You can also denote a certain percentage to be distributed to your beneficiaries in your policy. For example, one beneficiary can receive 60% of the death benefit, while the other would receive 40%.

Who should you never name as your life insurance beneficiary?

Avoid naming your estate, your minor child, or your pet as a life insurance beneficiary. However, it’s important to name someone or a charitable organization; not naming a beneficiary defeats the purpose of having a life insurance policy in the first place.

Insurance Expert

Rebecca Shoenthal

Insurance Expert

Rebecca Shoenthal is an insurance editor at Policygenius in New York City. Previously, she worked as a nonfiction book editor. She has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.

Life Insurance Expert

Nupur Gambhir

Life Insurance Expert

Expertise
Nupur Gambhir is a life insurance editor at Policygenius in New York City. She has researched and written extensively about life insurance since 2019, with specialties in life insurance companies, policy types, and end-of-life planning. Her writing on insurance and finance has appeared on MSN, The Financial Gym, and end-of-life planning service Cake. Previously, she worked in marketing and business development for travel and tech.

Education
Nupur has a B.A. in Economics from Ohio State University.

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