Everything you need to know about life insurance beneficiaries

If you’re thinking about buying this type of supplemental policy, here’s what you’ll want to know.

Maybe you just got married — or you have a little one on the way. A life insurance plan may come in handy if the unexpected were to happen. You’ll know that your loved ones have the support they need.

To make sure your loved ones receive your plan’s payout, you’ll need to officially appoint a beneficiary (or beneficiaries).

Figuring out who should be a beneficiary is an important decision. It all depends on where you want the funds to go to. Read on to learn about the types of beneficiaries and what factors to consider when mulling over your options.

Interested in a life insurance plan? Call a licensed insurance agent at (800) 827-9990 to talk about plans, or browse your options find a local agent online today.

What is a life insurance beneficiary?

A life insurance beneficiary is a person or entity you appoint to receive your plan’s payout after your death.

“The most common beneficiaries are the person’s spouse or their children,” says Mike Raines, owner of Raines Insurance Group in Cumming, Georgia. “One reason is because these family members will most likely experience a financial burden as a result of the policyholder’s passing,” he says.

The purpose of naming a beneficiary is to help support them after your death. This might include help with end-of-life expenses such as the funeral and burial costs, outstanding medical bills or to supplement the loss of your income.

Although a beneficiary can be, and often is, a single individual, that’s not always the case. A life insurance beneficiary may also be:

Multiple people. You can choose several people as beneficiaries, assigning each a percentage of the death benefit. For instance, if there are several children or grandchildren, you can divide up the payments between them.

• A business or business partner. “If the insured is a key person or owner in a business, then the corporation or a business partner could be a beneficiary, since they would experience a financial loss if the insured dies,” says Raines.
• Your estate. A person’s estate refers to all of the personal possessions and assets they’re leaving behind. That might include real estate, personal property and financial accounts. “If the policy names the estate as a beneficiary, the proceeds will also be used to settle the deceased’s debts, including mortgage payments, credit cards, loans, utility bills and other liabilities,” says Susana Zinn, an independent life insurance agent in Miami, Florida. “These debts must be paid from the estate assets, including the death benefit, before any remaining funds can be distributed to the heirs.”
  It’s a good idea for a person who names their estate as their beneficiary to have a will — and in it, to specify how the funds are to be dispersed, says Raines. One thing to keep in mind: If you don’t designate a beneficiary, the death benefits will automatically go to your estate.
• The trustee of a trust you set up. An insured person can name a trust as the beneficiary, appointing a trustee who has the legal authority to manage and distribute the funds according to the terms set in the trust, says Zinn.
  A trust can be the way to go if you’re naming a minor grandchild as a beneficiary, since minors typically can’t receive life insurance proceeds directly, adds Zinn. Other situations where someone might need to think about setting up a trust could be if the beneficiary has a disability, or they can’t be trusted to manage a large sum of money.
• A charity. “Policyholders may designate a charitable organization as the beneficiary to support a cause they care about,” says Zinn. Some people also choose to leave a gift or endowment to a nonprofit or an educational or religious institution.

A life insurance policy could help your family if you pass away unexpectedly. Call a licensed insurance agent at (800) 827-9990 to talk about plans, or browse your options find a local agent online today.

What types of life insurance beneficiaries are there?

There are 2 main types of life insurance beneficiaries:

1. Primary beneficiary. “The primary beneficiary is the main recipient and first person or entity designated to receive the life insurance proceeds upon the policyholder’s death,” says Zinn.
2. Contingent beneficiary. A contingent (also known as secondary) beneficiary serves as your backup. “They’re the individual or entity that will receive the proceeds if the primary beneficiary is deceased or unable to claim the benefit at the time of the policyholder’s death,” Zinn explains.

How life insurance may be paid out to beneficiaries

Life insurance may be paid out to beneficiaries through several steps. But the first thing to do if you’re a beneficiary is to notify the insurance company of the policyholder’s death, says Zinn.

The beneficiary will have to provide a death certificate and may need to fill out claim forms provided by the insurance company. “Then the insurance company reviews the claim, verifies the policy details and ensures there aren’t any issues such as a lapse in coverage or contestability period concerns,” says Zinn. (A contestability period is a clause in a life insurance contract that gives the insurer the right to investigate an application for inaccurate or fraudulent information.)

Once the claim is approved, beneficiaries may receive the payout. The fund disbursement options are:

• Lump sum. Beneficiaries receive a one-time payment of the entire death benefit.
• Installments/annuities. Payments are spread out over a specified period or for the beneficiary’s lifetime.
• Retained asset account. The insurer holds the funds in an interest-bearing account, and the beneficiary can write checks against it.

The timeframe for payouts can vary, but it typically takes from a few weeks to a couple of months after the claim is filed.

Can a beneficiary be changed after the policyholder dies?

The answer is no. “A life insurance beneficiary cannot be changed after the policyholder passes away,” says Zinn. “Once the policyholder dies, the beneficiaries listed on the policy are final, and the insurance company will pay the proceeds to those named individuals or entities.”

Things to consider when choosing a life insurance beneficiary

When choosing a life insurance beneficiary, you’ll want to carefully evaluate who depends on you financially and their future needs, says Zinn.

You’ll also want to take into account the potential tax consequences the beneficiary may face. While generally death benefits aren’t included in gross income and a beneficiary doesn’t have to report them, any interest the beneficiary earns from the death benefits is taxable, according to the Internal Revenue Service.

Raines advises that in the event of certain major life events, such as marriage, divorce or the birth of a child, it’s crucial to update your listed beneficiaries to reflect those changes. It’s also a good idea to check your policies annually to confirm all beneficiaries are included and that the contact information for those listed beneficiaries is correct, he adds.

Need more information about life insurance plans? Call a licensed insurance agent at (800) 827-9990 to talk about plans, or browse your options find a local agent online today.