Updated March 31, 2021|5 min read
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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 policy’s beneficiary.
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 to name on your policy, and how to ensure that they actually get the life insurance payout.
You can only name someone as your life insurance beneficiary if they will financially suffer when you die
Name a secondary beneficiary in case your primary beneficiary cannot accept the death benefit
You can name multiple beneficiaries, including organizations like a charity
Updating your beneficiary with big life events ensures the payout doesn’t go to your estate or the wrong person
You can choose a legal entity or organization or anyone with insurable interest to be your life insurance beneficiary. Common choices include:
You can have multiple beneficiaries and even designate what percentage of your death benefit each person receives. It’s important to name both primary beneficiaries and contingent (or secondary) beneficiaries. Contingent beneficiaries receive the death benefit if your primary beneficiaries are unable to do so.
There are some factors to consider if you intend to name a child or trust as your beneficiary, or if you want to name someone other than your spouse in a community property state.
Most people choose their spouse as their primary beneficiary so their life insurance proceeds can help pay the bills or cover future expenses, like your kids’ college tuition.
In the following nine states with community property laws, you need your spouse’s consent to name someone other than them as your beneficiary:
Alaska, Tennessee, and South Dakota have voluntary community property laws. Community property laws requiring your spouse’s consent on named beneficiaries only apply if your policy goes in force after getting married.
We don’t recommend naming your children as beneficiaries if they’re still minors because you’ll need to jump through some legal hoops to do so and it can delay their access to the money.
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 holds onto the money until the child reaches the age of majority, which is 18 or 19 years old depending on your state.
It’s best to name a trusted adult who can immediately access the payout and put it toward your child’s care. You can also designate a trust in the child’s name as the beneficiary, and the fiduciary in charge of the trust will allocate the benefit according to your wishes.
When you name a trust as your beneficiary, an appointed conservator receives your death benefit and disburses the money on your behalf. You might name your trust as a beneficiary to:
Avoid estate taxes on your death benefit
Ensure your payout benefits your minor children
Protect a less conventional beneficiary, like a pet
If you name someone to inherit your pet or be the legal guardian of your child in your will, a trust will make sure that your death benefit will be used for your intended beneficiary’s care.
There are multiple types of trusts and you might not need one depending on your assets and your will. A certified financial planner can help you determine your estate planning needs.
If you don’t choose any primary beneficiaries or if they predecease you, the insurance company will pay your benefit to your estate. This can significantly slow down the disbursement of your life insurance benefit because it’ll be subject to probate, when the courts determine who should get your assets.
If you have a high net worth and your death benefit goes to your estate, your family may also have to pay an estate or inheritance tax.
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Keeping your life insurance beneficiaries up to date is one of the best things you can do to protect your loved ones. The policyholder is the only person who can make changes to a policy’s beneficiary designation. Consider making updates after major life events, such as:
Birth of a child
You can make a beneficiary change at any time by contacting your life insurance company. Some allow you to make these updates online, while others require a phone call or a paper change of beneficiary form that you either mail or fax to your provider.
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.
After your beneficiary submits a life insurance claim, they will receive their designated portion of the death benefit directly in their bank account. There are a few common ways to get the money:
Lump sum: The entire amount is paid out all at once. Most people choose this option because it is 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 over a set period. This option is best for people who have no immediate financial obligations and want to accrue interest on the death benefit.
Retained asset account: The benefit is held in a checking account by the insurer and you make withdrawals as needed. The unused funds accrue taxable interest.
You may also opt to pay your beneficiaries per capita or per stirpes in the event one beneficiary dies. Per capita, in which the remaining beneficiaries receive an equal split, is the default and works for most people.
Per stirpes reserves a deceased beneficiary’s payout for their heirs. The option is best if you want your insurance proceeds to benefit your beneficiary’s family, like a grandparent providing for an adult child and their grandchildren.
There are some scenarios in which the life insurance company may not pay out the death benefit. While it’s a rare occurrence, a policy may not pay out if:
You misrepresented information on your life insurance application
You died by suicide within the first two years of your policy
The beneficiary murdered you to collect the payout
Particularly during the first two years of your policy, known as the contestability period, life insurance providers may review your initial application if they suspect you withheld information to get lower premiums. If they find you were dishonest, they could deny or reduce the death benefit for your beneficiaries.
If the insurance company denies a death claim, they typically refund any premiums the policyholder paid previously.
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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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, there are some situations in which a beneficiary will need to pay taxes on money related to the life insurance payout:
Benefits paid as an annuity: When beneficiaries choose to receive their payout in installments, the undistributed funds may gain interest. That interest is subject to taxation.
Estates subject to taxation: If your assets total $11.7 million or more and your policy pays to your estate, the death benefit is included in the calculation for any estate or inheritance taxes your beneficiaries will pay.
Your life insurance beneficiaries are the main reason to purchase your coverage, which makes it all the more important to make sure that they actually receive the death benefit. By updating your policy regularly and consulting with a certified financial planner about how to best designate the death benefit, you can safeguard your family’s financial security.
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.
The funds are split among the surviving primary beneficiaries or go to your contingent beneficiaries. If there are no contingent beneficiaries, it is paid out to your estate.
If there are two beneficiaries listed on a life insurance policy, the death benefit is distributed amongst them evenly, unless otherwise noted.
Avoid naming your estate, your minor child, or your pet as a life insurance beneficiary, which can tie the funds up in legal proceedings.
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