A life insurance beneficiary is a person or entity entitled to receive the money from your policy’s death benefit when you pass away. When you purchase a life insurance policy, you choose the beneficiary of the policy. Your beneficiary may be, for example, a child or a spouse.
In this article, we’ve provided possible answers to questions that border around Life Insurance Beneficiary. Read on to learn more about naming or being a life insurance beneficiary.
Table of contents
What Is a Life Insurance Beneficiary?
A life insurance beneficiary is a person or entity that will acquire the money from your policy’s death benefit when you are no more.
You can name an heir, who can be a person or an entity when you buy a life insurance policy. You can also have more than one life beneficiary. If you die during the policy’s term, you will receive a lump-sum payment or a series of payments.
As the policy owner, you can pass the money on as you wish:
- You can name one person to receive it all.
- You can name two or more people to split the entire amount in the way you decide.
- You can name your estate.
- If you have a trust or want one, you can name it to receive the money from the policy.
- Some people prefer to give money to a charity when they pass on; you can name any valid charity you want.
One of the fastest ways to choose a life beneficiary is by creating a trust or custodial account. The money is placed in the trust for your children; a trustee then manages it until your kids reach legal age or the age you decided to let them have it.
If you fail to choose a life beneficiary, your estate becomes the “de facto” beneficiary.
How Do You Name Insurance Beneficiaries?
When you are choosing insurance beneficiaries, ensure you provide the correct details of your proposed beneficiaries like their social security number, birthday, and contact information. Endeavor to double-check it before you submit it to make sure it’s all correct. In a case of errors, the wrong people might receive the money, or legal problems could arise that your heirs have to deal with.
For instance, say you write “spouse” as your beneficiary. You get divorced two years later and remarry without modifying your policy. Both your former spouse and your current spouse may try to claim the money after you pass.
Since “spouse” is unclear, you’ve created a legal issue that can delay payout. One was your legal spouse when you passed on, and the other was your legal spouse when you created the policy. A fight over the money is likely to occur, along with all the legal fees, stress, and heartache that always follow fights over money.
Things To Consider When Choosing A Life Beneficiary: Life Insurance Beneficiary Rules
Primary and Contingent Beneficiaries
In many cases, you can afford to name one or more contingent beneficiaries on a policy. A contingent beneficiary is someone who acquires some or all of the money if the primary beneficiary (or beneficiaries) are dead or cannot be found.
If you name more than one person, name the amount (in a percent form) of money that each should receive.
Let’s say you purchase a policy with a $1 million benefit. You name your spouse as the beneficiary. If you die during the policy’s term, your partner will receive the full amount.
Your primary beneficiary, on the other hand, may die before you. You add your three adult children as contingent beneficiaries to ensure that the money goes to your children. You add them all to the policy and divide the money equally between them. If your spouse dies before you, your children will each receive a third of the money after you have passed away.
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Per Stirpes and Per Capita
Another important thing to consider when naming beneficiaries is whether to choose per capita or per stirpes. This shows how the money should be shared if one or more of your beneficiaries dies and no other contingents are listed on the policy.
Per capita (“per head”) is usually the default designation. This entails you don’t need to go into detail about each event that might occur. Instead, each of your living beneficiaries receives an equal share. For instance, if you have three adult children and one dies before you, the remaining two children each receive one-half of the face value instead of one-third.
If you choose per stirpes and one of your beneficiaries dies before you, that person’s children will receive their amount if they have kids. For example, if one of your three adult children dies before you and is survived by two children, a per stirpes agreement would give your two grandchildren the one-third that your child was going to get. Each grandchild would receive one-sixth of the money.
Some beneficiary designation forms will have a box you can check to select per stirpes. If no box exists, check with your agent to see if you can write per stirpes in.
How To Choose A Life Insurance Beneficiary
Selecting a beneficiary is a highly privy decision based on your values and financial circumstances. Your beneficiary can be any person or entity of your choice, such as a spouse, child, trust, charity, etc.
1. Spouse:
Consider how losing your income would affect your spouse’s financial situation if you died. Would he or she be able to support themselves? Benefits from life insurance can be used to pay for things like your mortgage, long-term debt, and even funeral expenses.
Certain states require your spouse’s permission to name someone else as your life insurance beneficiary.
2. Child
If your children solely depend on you, life insurance benefits will be used to pay for their education and cater to other needs in your absence.
However, it is worthy to note that minors (defined as under age 18 or 21, depending on the state) cannot be named as direct beneficiaries, according to the American Institute of Certified Public Accountants (AICPA). You can create trust in the child’s name or designate an adult custodian for the funds instead. This trust or adult custodian may then be named as beneficiary of the policy, recommends the AICPA.
READ ALSO: How Much Life Insurance Do You Need?
3. Charity
If there’s a charitable cause dear to your heart, you can name a charity as your lie insurance beneficiary.
4. Multiple beneficiaries
You can specify that your benefit is divided, for example, in thirds between two children and a surviving spouse. If you choose multiple beneficiaries, you must state what amount or percentage of the death benefit each beneficiary should receive.
If you don’t name a beneficiary, most life insurance policies will name a default beneficiary for you. Your estate is usually the default beneficiary, but it’s a good idea to check with your agent to see who your policy’s default beneficiary is.
5. Extended family
While married people typically choose to name a member of their nuclear family as their insurance beneficiaries, single people can choose to name anyone who is either related to them or who might depend on them financially.
You may also be able to name a partner or good friend to whom you’re not married. However, some states suggest unrelated beneficiaries to have a financial relationship with you (i.e. share rent or living expenses). That’s known as an “insurable interest.”
6. Your business
You can identify your company as a beneficiary, or you can name your business partners as beneficiaries. That way, if something happened to you, your partner could afford to buy out your portion of the company, or your insurance profits may help your heirs find a new owner.
Who Can Change The Life Insurance Beneficiary?
It is advisable to designate at least one beneficiary during the application process for life insurance. The designated beneficiary can be changed anytime you feel like.
For instance, you may have some changes in your life that give you a reason to appoint someone else. You might want to appoint someone else in the case of a marriage or divorce. The birth of a child is a good reason to revisit your policy as well. Or, you might have another reason that warrants a change.
However, if you’ve made an “irrevocable” beneficiary, you’ll need to get their consent to make any change (they’ll need to sign the policy change form).
Also, in some cases, your insurance company or state may restrict who you can name. For example, married couples who live in community property states may need their spouse to reach an agreement before they can name anyone else.
If you wish to change or add an heir, request a “beneficiary change form” from your insurer.
Do Beneficiaries Pay Taxes on Life insurance Policies?
When taken as a lump sum, a life insurance death benefit is usually not considered taxable income. However, there are instances in which you might owe some tax.
For instance, if the money is received as monthly payments or as an annuity, any interest paid on top of the face value is taxable income. Also, if the money is paid to your estate instead of a person, it may be subject to estate taxes. The good news here is that unless your estate is worth more than $11.7 million, it will not trigger any estate taxes.
What Happens To Life Insurance With No Beneficiary?
If a parent, spouse, or even an elderly neighbor dies with an unnamed beneficiary on a life insurance policy, the proceeds are paid to the insured’s estate. This is both financially and logistically troublesome. When death benefits are paid directly to the beneficiary, they are not taxable. However, once the death benefit is rolled into the estate of the deceased, it is liable to state and federal taxes. It can also be used to pay off any debts that the insured has accumulated. In addition, the procedure of dispersing the estate’s net proceeds after obligations and taxes have been paid is time-consuming. You won’t see those cash for a year or longer as the insured’s heir.
For these reasons, it’s important to pick a beneficiary or beneficiaries on your life insurance policies. A policy without a named beneficiary is deficient and can’t have the advantages of a policy with one.
Conclusion
The weight behind the pros of having a beneficiary for your life insurance has an everlasting advantage over not having a life beneficiary as it protects financially and automatically insurers the lifetime and livelihood of your family or business or noble cause as the case may be.
References
- thebalance.com – What Is a Life Insurance Beneficiary?
- allstate.com – What is a Life Insurance Beneficiary?
- northwesternmutual.com – What Is a Life Insurance Beneficiary?
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