Choosing a life insurance beneficiary
A life insurance policy is designed to provide financial support for individuals or organizations of your choosing after your death. A life insurance beneficiary is the person who receives the life insurance payout from your policy when you die. The beneficiary or beneficiaries can typically use this money in any way they see fit. This may include paying off your debts, paying for end-of-life arrangements or supplementing their income in your absence.
What is a life insurance beneficiary?
A life insurance beneficiary is the individual or entity designated to receive the policy’s death benefits upon the policyholder’s passing. This role is pivotal in life insurance arrangements, ensuring that the financial proceeds reach the intended recipients. In terms of what a life insurance beneficiary is, there are two main types: primary and contingent, both of which can be revocable or irrevocable in nature.
- Primary beneficiary: A primary life insurance beneficiary is the person who will receive any death benefits when the policyholder dies. You can have multiple primary beneficiaries who each receive a percentage of your death benefits.
- Contingent beneficiary: A contingent beneficiary receives your death benefits if the primary beneficiary dies before funds are disbursed. The contingent beneficiary will also receive the payout if the primary beneficiary is unable to be found.
The flexibility in choosing beneficiaries is broad, extending beyond individuals like family members to include entities such as trusts and charities. Trusts can be an effective tool for managing how and when the benefits are distributed, while naming a charity as a beneficiary can reflect personal values and philanthropic desires, contributing to a legacy that aligns with your life’s impact.
Revocable beneficiary vs. irrevocable beneficiary
A revocable beneficiary is someone who is designated to receive your death benefit when you die but who can also be removed as a beneficiary by you at any time and for any reason. When you make the change, you don’t need their signature — meaning the change can be done without the person ever even knowing.
An irrevocable beneficiary also receives death benefits when you die, but the difference is that if you change your mind about them being a beneficiary, both you and the irrevocable beneficiary must sign off on the change. If both parties don’t sign the necessary documents, that person remains a beneficiary on your life insurance policy.
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Whole life insurance combines life insurance with an investment component.
- Coverage for life
- Tax-deferred savings benefit if premiums are paid
- 3 variations of permanent insurance: whole life, universal life and variable life include investment component
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.
- Fixed premium over term
- No savings benefits
- Outliving policy or policy cancellation results in no money back
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What to consider when choosing your beneficiary
When selecting a life insurance beneficiary, a critical factor to consider is the beneficiary’s age. Naming a minor is often not advised because insurers typically do not disburse policy proceeds directly to minors. Knowing this, you may want to set up other arrangements, such as appointing a trustworthy guardian or setting up a trust, to oversee the funds on behalf of the minor until they reach legal adulthood. This ensures that the financial benefits intended for their support are managed and distributed responsibly.
If the beneficiary is legally disabled, you may want to consider creating a special needs trust. This way, the beneficiary will be able to receive your death benefit without losing any government assistance. Another aspect insurers may evaluate is the principle of insurable interest. This concept is vital as it establishes a legitimate financial or emotional connection between the policyholder and the beneficiary, underscoring the impact the policyholder’s death would have on the beneficiary. Insurers prioritize this to ensure the policy serves a genuine protective purpose and isn’t subject to potential misuse. It’s important to note that the requirement for insurable interest exists at the time the policy is initiated, not necessarily at the moment of payout. This criterion safeguards the integrity of the life insurance agreement, ensuring it aligns with the intent to provide financial security to those genuinely affected by the policyholder’s absence.
If you live in a community property state, and you want someone other than your spouse to be the beneficiary, you will need your spouse to sign a form waiving their rights to your death benefits. In a community property state, both spouses equally own any income made during the duration of the marriage as well as any property or belongings that may have been purchased with that income. If income earned during the marriage is used to pay the premiums for your life insurance policy, then that policy — and any money paid out from it — will be considered community property. This means that your spouse will be entitled to receive at least a portion of the payout. The following nine states are community property states:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
In the event of a remarriage, particularly when there are children from a previous marriage, you should be mindful of how you set up life insurance benefit distributions. Balancing the financial security of your new spouse with that of your children necessitates thoughtful consideration. Consulting with a financial advisor or licensed insurance agent can provide valuable guidance in making an informed decision that best reflects your wishes and ensures equitable distribution of the death benefit among your loved ones.
How to name a beneficiary on your life insurance policy
After you’ve purchased your life insurance policy and determined who you want to be your life insurance policy beneficiary, you will need to identify them on a life insurance beneficiary designation form. This form is a legal document that your life insurance company uses to determine who receives your death benefits when you die. This document can override any last wishes you’ve made in your will, so it may be especially important to take your time determining who to name as your beneficiaries and how much each person should receive.
When filling out your life insurance beneficiary designation form, you will likely need the following information about the person you’re naming as your beneficiary:
- Full legal name (first, middle and last name)
- Full address (street address, city, state, zip code, as well as country)
- Phone number (include both cell and landline if possible)
- Social Security number
- Date of birth
Keep in mind that many people choose a business or charitable organization as a beneficiary on their life insurance policy. This is an especially common choice for contingent or secondary beneficiaries — in the event your primary beneficiary dies before you do or does not accept the death benefit, there would be an organization specified to receive the funds. If you choose to include a business or organization as a beneficiary, you may need to provide:
- The full name of the organization or business
- The mailing address for a main office
- The business or organization’s tax ID number
Can you choose more than one life insurance beneficiary?
Yes, you can choose more than one person to receive your life insurance benefits. If you decide to choose multiple people as beneficiaries, you’ll have to decide how much of the death benefit they each receive.
You can choose between a specific percentage: per stirpes or per capita.
- Specific percentage: With this type of payout, each of your named beneficiaries receives a certain percentage of your life insurance death benefits. If you have two children, for example, you could designate that one would receive 30 percent and the other, 70 percent of your benefits.
- Per stirpes: This payout method may be useful if a named beneficiary dies before the policyholder or before the payout can be distributed. Instead of the entire life insurance payout going to the other named beneficiary, it is divided amongst the remaining family of the intended deceased beneficiary. For example, if you have two grown children, each with their own family, and one of them dies, the deceased’s children would receive their portion of your death benefit.
- Per capita: With per capita, each person who is eligible to receive your death benefits is given a percentage equal to everyone else’s. For example, if you have three grown children, and one of them dies, the other two would split your death benefit equally.
Lastly, you may also be able to determine how much money your beneficiaries are given at once. You can likely choose for them to receive everything all at once, or you can choose for them to receive their money in fixed monthly installments.
Frequently asked questions
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Yes, changing your life insurance beneficiary after you buy a policy, no matter the type of life insurance policy, is possible, particularly if you’ve designated them as a revocable beneficiary. Updating beneficiaries isn’t uncommon, as life can bring many changes throughout the life of a policy. However, if your beneficiary is irrevocable, their consent, through a signature, is necessary for any adjustments to be made.
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If you haven’t named a beneficiary by the time you die or if there are no surviving beneficiaries, your life insurance payout goes to your estate. What happens to your estate when you die depends on where you live. Most often, the money in your estate is first used to pay off your debts. After that, it is subject to any fees and taxes before a probate court distributes the remaining amount to your heirs.
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No, beneficiaries generally do not pay taxes on payouts from term, whole or universal life insurance policies. There are some cases, though, in which the benefit proceeds are taxable. These include if the money is paid in installments over time in the form of an annuity, if a cash policy is left behind or if the beneficiary is an estate rather than an individual.
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You can change your life insurance beneficiary for any reason. Often, policyholders may change their life insurance beneficiary after a life-changing event, such as a divorce or childbirth. If you listed a church as a beneficiary and are no longer affiliated with it, that may be another reason to change your beneficiary. Keep in mind that you may change who receives your death benefit at any time on your own if they are listed as revocable. If you have an irrevocable beneficiary, you’ll need their signature before making an official change.
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