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The premise of life insurance is simple. You pay a premium to keep your policy active, and when you die, your insurer will pay a death benefit to your beneficiaries.
You have the freedom to choose your own beneficiaries, but it can get a little sticky if you live in a community property state or want to leave money to a minor.
What's in this guide?
- What is a life insurance beneficiary?
- Who’s eligible to be a beneficiary?
- Can I have multiple beneficiaries?
- How to name a beneficiary
- Can I update my beneficiaries?
- How are beneficiaries paid out?
- What happens if you die without a life insurance beneficiary?
- Compare life insurance companies
- Bottom line
What is a life insurance beneficiary?
A life insurance beneficiary is the person, organization or entity you nominate to receive the proceeds of your life insurance policy when you die. Some states impose regulations on who you can and cannot name.
Who’s eligible to be a beneficiary?
Though most people name their spouse and children as their beneficiaries, you can elect a friend, family member, business partner, charitable organization or a legal entity — like your estate or a trust.
There are a few things to keep in mind when naming beneficiaries.
Community property laws
If you’re married and live in a community property state, you’ll need your spouse’s consent if you want to nominate someone else as your beneficiary. These are the states where this law applies:
- New Mexico
Life insurance companies won’t pay out your policy directly to a minor. If you want to leave money to your children, you’ll need to go down one of the following paths:
- Set up a life insurance trust. As the grantor of the trust you’ll choose a trustee to manage the trust and distribute the money according to your wishes. You can also decide how the funds will be allocated, and when they’ll be paid out.
- Name an adult custodian. Under the Uniform Transfers to Minors Act (UTMA), you can name an adult custodian to manage the money from your life insurance policy while the children are still minors. Your life insurance company can help you to establish an UTMA account. When you die, the custodian can use the funds to cover things like education and housing costs. Once the children reach the age of maturity — which is 18 to 21 in most states — the custodians passes the remaining money onto them.
Can I have multiple beneficiaries?
Yes. You can name more than one beneficiary, and allocate the percentage of the death benefit that should go to each.
Primary, contingent and final beneficiaries
There are three types of life insurance beneficiaries: primary, contingent and final.
- The primary beneficiary is first in line to receive the proceeds of a life insurance policy. You can nominate multiple primary beneficiaries, and decide how much money should go to each.
- The contingent — or secondary — beneficiary receives the death benefit if the primary beneficiary dies before the policyholder.
- The final beneficiary receives the payout if both the primary and contingent beneficiaries pass away before the policyholder.
You should name at least one primary beneficiary, but nominating a contingent and/or final beneficiary is optional.
How to name a beneficiary
Once your policy application is approved, the insurer will ask you to designate beneficiaries. You’ll need to provide their full names, birthdates and if possible, Social Security Numbers. This will make it easier for your insurer to identify your beneficiaries after your death.
If you’ve taken out a policy, it’s important to tell your beneficiaries that you’ve nominated them. Life insurance companies aren’t legally obligated to contact beneficiaries upon a policyholder’s death, so they’ll need to take action to claim the death benefit.
Can I update my beneficiaries?
Yes. You can update your beneficiaries at any time.
You’ll need to contact your life insurance company, who will then typically direct you to fill out an online or paper form.
If you have an estate and/or will, you might want to notify your estate planner about the beneficiary change or update your will if necessary.
When should I consider changing my beneficiaries?
These major life changes might trigger you to reconsider who’ll receive the death benefit when you die:
- Having a child.
- Getting a divorce.
- Gaining new stepchildren.
- The death of a beneficiary.
This is also a good time to review your policy and make sure you have adequate coverage. If your financial obligations have increased, you could look into purchasing another policy or boosting the value of your current coverage.
How are beneficiaries paid out?
Most insurers pay out the death benefit within two weeks of approving a claim, but some take as long as 60 days.
The beneficiary can choose how they want to receive the money. Usually, they’ll be given two options:
- Lump sum payment. You’ll get a one-time payment from the insurance company.
- Installments and annuities. You can opt to receive the money in installments, typically over the course of five to 40 years. For example, you might request to get 20% of the death benefit every year for five years, or 10% every year for 10 years.
Is the payout taxed?
There’s one exception to this rule. If the policyholder’s estate is valued at $11.4 million — the IRS threshold for 2019 — or more, it will be subject to federal estate taxes. The life insurance payout will be rolled into the estate and taxed accordingly.
What happens if you die without a life insurance beneficiary?
Your will pay out the death benefit to your estate, and it might be subject to probate — which is when the court gets involved to determine who’s entitled to your assets.
Compare life insurance companies
To make sure the proceeds of your life insurance policy go to the right person — or people — when you pass away, it’s important to name beneficiaries. In most states, you can nominate anyone you want as a beneficiary, and update them if you experience any major life changes.
If you’re shopping around for a policy, take the time to compare life insurance companies.
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