What is the point of life insurance? To ensure the financial security of your loved ones if you pass away. You choose the person or people who get your life insurance proceeds, but if you don't keep them updated, the results can be catastrophic for your family's money.
If you don't know what a life insurance beneficiary is or want to avoid a critical mistake, make sure you understand these vital facts about life insurance beneficiaries.
What is a life insurance beneficiary?
In life insurance, the term life insurance beneficiary is the person who receives a death benefit if the insured individual passes away during the covered term. In other words, if the person with life insurance dies, the beneficiary gets the cash from a life insurance policy.
The entire purpose of life insurance is to give someone money if you die, so it's important to choose who will get that money and keep that person up to date. Whether you get life insurance through work or a policy you purchased on your own, the beneficiaries work the same.
Primary vs. contingent beneficiaries
The primary beneficiary is the first in line to receive your death benefit. If you include multiple people, you can divide the proceeds evenly or give a specific percentage to each. You can also designate a contingent beneficiary, which is a fancy way of saying backup beneficiary in the event your chosen beneficiary has also passed away.
If you don't choose a beneficiary, the policy generally pays out to your estate. That puts the cash up for creditors and lenders who will try to get the money for unpaid debts instead of writing a check directly to your loved ones.
Individual vs. entity beneficiaries
Life insurance beneficiaries aren't limited to people. You can also name charities or non-profit organizations as primary or contingent beneficiaries.
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Designating a life insurance beneficiary
- Dependents: First and foremost, you'll want to assign the proceeds of your policy to someone who relies on your income for financial support. This is often a spouse or your children, but it could also be a business partner.
- Age: Children under 18 can't receive benefits directly. You'll assign a legal guardian or create a trust for the minor and appoint a trustee to manage the funds until the child reaches legal age.
- Ability to manage money: If the beneficiary is unable to manage the money, such as in the case of lifelong or special needs dependents, you can establish a trust under your beneficiary's name and designate a trustee to oversee the assets and disburse the funds.
- State or life insurance company rules: Your state government or life insurance providers may limit who you can name as your beneficiary. For example, policyholders in certain states must name their spouse as a beneficiary and allocate at least 50% of the benefit to them.
Changing a beneficiary
If you get divorced, which is increasingly common in the United States today, you probably don't want your ex-wife or ex-husband to get your life insurance payout if something happens to you. However, that very scenario happens quite frequently.
Life insurance is outside of a will or trust, so you'll have to update your life insurance beneficiaries even if you update your will. A will or trust controls what happens to your assets, such as bank accounts, investments, real estate, and possessions, if you pass away.
Nothing overrides your choices here, so make sure to update your beneficiaries if you have a major life change or change in preferences.
How to update your life insurance beneficiary
My first life insurance came from work in my early 20s. I wasn't married and didn't have kids, but life insurance was a completely paid-for benefit from my employer. You can't beat free! I chose my sister as my life insurance beneficiary at that time.
When I got married, I filled out a form on my company's intranet to update the beneficiary from my sister to my wife. It took less than five minutes. All I needed was her name, contact information, and optionally her Social Security number for verification.
For your own life insurance outside of work, contact the insurance company for information on making updates. It usually requires a quick form, which may be completed online in some cases.
If you have children or other preferences for where your life insurance money goes, make sure to include them as well. Take a few minutes to update or review your choices if you have any doubts or questions.
How beneficiaries file a life insurance claim
In order for beneficiaries to receive life insurance death benefits, they must submit a claim form with a copy of the policyholder's death certificate. Insurance companies may also require the following information about the deceased policyholder:
- Name
- Date of birth
- Date and cause of death
- State or residence, Social Security number
- Policy number
The beneficiary will then choose how they'd like to receive their payout. Their disbursement options include:
- Lump sum payout: Receive the full death benefit amount at once.
- Annuity payout: Receive a steady stream of income.
- Payout in a retained asset account: Holds payout in an interest-bearing accountant. Withdrawals can be made as needed.
Tax implications for insurance beneficiaries
Beneficiaries won't have to pay income taxes on policy proceeds if they receive the life insurance policy's proceeds in a lump sum. However, if the proceeds are paid out in installments or the beneficiary chooses to invest them in an interest-bearing account, the proceeds and any interest earned on those funds may be subject to income tax.
If life insurance proceeds are included in the policyholder's estate and exceed $13.61 million (in 2024) and $13.99 million (in 2025), the beneficiary will owe estate taxes on the excess amount beyond those thresholds.
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FAQs
Can a minor be a life insurance beneficiary?
You can name a minor as your life insurance beneficiary, However, they can't directly receive the death benefit. Instead, you must establish a trust under their name and appoint a trustee to manage the funds until the minor reaches adulthood.
How many beneficiaries can I name on my life insurance policy?
You can name multiple beneficiaries and specify the percentage of the death benefit each should receive.
What happens if my primary life insurance beneficiary predeceases me?
If the primary beneficiary is no longer alive, the death benefit will be paid to the contingent beneficiary if one is named. Otherwise, the payout may become part of your estate.
Do beneficiaries pay taxes on life insurance proceeds?
If the beneficiary receives a lump sum payment, it isn't subject to income taxes. However, if the beneficiary receives the proceeds in installments or earns interest, they must pay taxes on any earnings.
Can I change my life insurance beneficiary after a divorce?
Yes, you can change your beneficiary at any time. It's important to review and update your designation after major life events like divorce to ensure the benefit aligns with your current wishes.
