What is a life insurance beneficiary?

If you have a life insurance policy, and you’ve been keeping up with your premiums, your insurer will pay out a death benefit when you die. The person or organization who receives the death benefit is called the beneficiary.

If you have a life insurance policy, and you’ve been keeping up with your premiums, your insurer will pay out a death benefit when you die. But because you’re dead, you won’t receive it. Instead, the benefit gets paid to someone you designate with the insurance company, such as your spouse. That person is called a beneficiary.

Your life insurance beneficiary can be a family member, a friend or business partner, or an organization or legal entity like a trust or your estate. While the beneficiary is your choice, some states have laws that regulate whom you can name as a beneficiary.

You can 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 the beneficiary.

Primary & contingent beneficiaries

  • Your primary beneficiary is the original person or organization you designate with the insurer to receive the life insurance proceeds when you die. For most people, this designatee is their spouse. If you don’t choose a primary beneficiary, the insurance company will pay out to your estate, which could tie up the disbursement of cash in bureaucratic red tape. You can name multiple beneficiaries and determine how much of a stake in the payout each one gets.

  • 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 goes out of business before you die. Although the contingent beneficiary is named in the life insurance policy, he or she won’t receive a portion of the death benefit if any of the primary beneficiaries are still alive. The first contingent beneficiary is called the secondary beneficiary, the third is the tertiary beneficiary and so on.

Who can be a 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 he or she won’t struggle with paying the bills or for your kids’ college.

Additionally, nine states have “community property” laws on the books that make it illegal to name someone other than your spouse as your beneficiary without his or her consent, if you got the policy after getting hitched. These states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. (Alaska also has community property laws, but you and your spouse have to opt in to them.)

Your kids

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

If you do designate your child as your beneficiary, when the insurer pays out, the death benefit will go to a trust overseen by a court-appointed guardian, who will hold onto the money until the child reaches the “age of majority.” That means the child could be as old as 21 before he or she can collect, and your survivors could be on the hook for additional costs like attorneys’ fees.

You can get around this by designating a guardian or trustee ahead of time thanks to the Uniform Transfers to Minors Act. 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.

Nonrelatives

You can designate a business partner as a beneficiary, or even a friend. Remember, your beneficiary can be anyone you want as long as you don’t live in a community property state and have a spouse.

Organizations

Your named 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 opt to do this if their family is already well off. A sudden injection of cash can help any business prosper after the loss of a favored employee such as yourself.

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. Who knows? — maybe you’ll even get your name on a museum wing!

A trust

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.

The most common reason you’d have the insurance company pay out to a trust is to make it easy for your kids to access the life insurance proceeds. However, people have used trusts to effectively leave money for their pets. You can accomplish that by naming someone to inherit the pet in your will, and then establish a trust to pay for the pet’s care using the money from the insurer.

Updating your beneficiaries

You have a 30-year life insurance policy, and when you got the policy you named your wife as your primary beneficiary. But 20 years in, the marriage has lost its spark, and you suddenly decide you’d rather leave your death benefit to your best friend, the Dungeon Master of your Sunday-afternoon D&D group. When that happens, you need to update your beneficiary.

And you should definitely update your beneficiary if your original beneficiary has died. When a beneficiary dies before you do, your policy’s death benefit gets paid out to her estate, where it could be held up in court or disbursed among relatives you don’t know or don’t like.

To assign a new beneficiary to your life insurance policy, all you have to do is contact your insurer and receive the proper “change of beneficiary” paperwork. You’ll need basic information about the beneficiary, including his or her Social Security number. Each insurance company requires you to submit your change of beneficiary form in different ways. We recommend calling them to find out how, or perusing our life insurance companies review page for more info. Remember to be specific, as any ambiguity could result in a legal battle.

Other times you should update your beneficiary include getting married (add your spouse), getting divorced (subtract your spouse), when buying a new home or car (to make sure your wife is the primary beneficiary in case she needs to make loan payments), or after having a child (same, but for paying for college).

Getting that cash money

Beneficiaries collect a tidy sum when the policyholder dies. But how does it work?

Claiming the death benefit

The beneficiary needs to do a couple of things before the insurer pays out:

  • First, your beneficiary needs to get a copy of the death certificate, which proves that the claim is legitimate.
  • Next, your beneficiary needs to dig up the policy document. This paper is something you should have saved in your records somewhere, so you should always make sure the beneficiary knows where to find it. If they can’t find it, your beneficiary will have to call up insurance companies until he or she finds the one who insured you, or have to look at your bank account to figure out where you were paying premiums. If your beneficiaries still can’t find the document, they can try these seven steps to find a lost life insurance policy.
  • Finally, your beneficiary needs to file a “request for benefits”, or claim form, with the insurer.

How the beneficiary gets paid

So your beneficiary found the right paperwork and correctly submitted the form. Now it’s time for him or her to get paid! He or she will get paid in the amount of insurance coverage you purchased and will have two options to receive the money:

  • The 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 tax-free!
  • The installment/annuity: Your beneficiary can also request to receive the payments in installments, such as monthly or annually. This is great if he or she thinks it’ll be easier to manage, or if they know their spending habits tend towards the less than thrifty. Installments can be spread out across five to 40 years.

Can a life insurance beneficiary get denied the death benefit?

Sure. If your beneficiary murdered you to collect the cash, the insurer will (hopefully) reject his or her claim. Thanks to “the slayer rule”, when you’re “south of heaven” and your life insurance beneficiary is the one who put you there, most states show no mercy if there’s a preponderance of evidence against the person trying to claim the death benefit.

Your beneficiary may also get denied if you die of a disease that you didn’t mention in your application, or which 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, you should make sure to include all your dangerous hobbies in your life insurance application. If your beneficiary tries to claim the death benefit and the insurer finds out you died from a previously undisclosed alligator-wrestling avocation, 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 commit 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 his or her 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.

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Disclaimer: 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.

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