An essential part of owning a life insurance policy is choosing a beneficiary to receive your life insurance benefits when you pass away. When considering a beneficiary, life insurance policies allow you to select a person or entity such as a spouse, child, or charity.
You can designate more than one, but it isn’t always a simple decision, since you need to take into account who will need financial support if you die. You may also want to change your beneficiary as your life changes due to marriage, children, divorce, or another major life event.
This complete guide answers your top questions about life insurance beneficiaries, including who you can appoint, how to change your designee, and what happens if you don’t name a beneficiary for life insurance.
What is the beneficiary in life insurance?
The beneficiary in life insurance is the person or entity that you designate to get the money from your policy if you die. The heir you choose is who is going to receive the death benefit while your life insurance policy is still active.
How much the beneficiary is given depends on what is written in the policy documentation. However, you may have a choice about how and when the funds are paid. Many insurers offer a lump sum of cash or smaller installments over a specific number of years to create an income stream.
Who Can Be a Life Insurance Beneficiary?
While married policyholders tend to name their spouse and parents often choose their children as beneficiaries, life insurance has few limitations as to who you can designate. Beneficiaries can include:
- Other family members
- Your estate
- Charitable organizations
- State governments
When considering who is the beneficiary in life insurance, keep in mind that policies don’t limit you to a single beneficiary. You can name two or more people or entities as heirs, and some insurers let you name up to ten. If you name more than one beneficiary, you must decide how your death benefit will be split between them.
For example, if you name your spouse and two children as beneficiaries, you might want your spouse to have 50% of the death benefit and let your two children split the remaining 50% by giving each child 25% (you have total control here as long as your life insurance payout totals 100%).
Over half of Americans have a life insurance policy, according to LIMRA’s 2020 Insurance Barometer Study. If you own one, have you considered who you named as your beneficiary?
Naming a Spouse as Beneficiary
Life insurance can provide financial support for your spouse after your death. But policies don’t typically require you to name your spouse as a beneficiary. You have the right to designate anyone you wish.
However, community property states can require your spouse’s written consent to name someone else as your beneficiary.
If you want to designate your spouse, there are a few rules & considerations:
- A spouse is not automatically added as a beneficiary on life insurance.
- If you have an existing policy before marriage, you can typically change the beneficiary to be your spouse at any time.
- Name an alternate beneficiary in case your spouse dies before you do.
- You cannot change a beneficiary in your will. You must fill out the documents with the life insurance company.
Your insurance policy is a contract between you and the insurance company. Because it’s legal and binding, you should update your beneficiary designations whenever you have a significant life event.
For example: Life insurance beneficiary laws in Florida automatically invalidate an ex-spouse’s beneficiary designation when a Judgment of Divorce is entered. Life insurance beneficiary laws in Texas are similar — the ex-spouse is automatically removed as the beneficiary upon divorce. But in many states, your spouse will not be automatically removed if you get a divorce.
Naming a Child as Beneficiary
If you’re a parent, it makes sense that you’d want to name your children as beneficiaries to provide financial protection for them after your death. Aunts, uncles, and grandparents may wish to name nieces, nephews, or grandchildren, as well.
If the child has reached the age of legal majority, there shouldn’t be a problem. However, life insurance heirs under the age of 18 or 21, depending on the state, cannot directly receive the proceeds of a life insurance policy.
In those cases, you would need to appoint a guardian to administer the proceeds. The guardian will control the funds for the minor’s benefit until they become an adult. If no guardian is appointed, the funds will be held by the life insurance company until the child reaches adulthood.
Non-U.S. Citizens and Foreign Beneficiaries
If you want to name someone who isn’t a United States citizen as a beneficiary, you might wonder, “can a life insurance beneficiary be in another country?” Luckily, there shouldn’t be a problem: A non-US citizen can be a life insurance beneficiary.
While rare, there are reasons you may have to pay taxes on life insurance, if you name a life insurance beneficiary in another country, they can receive the death benefit without paying U.S. income taxes on the amount.
Levels of Beneficiaries
In addition to naming your beneficiary, you can also designate the type of beneficiary. The most common beneficiary life insurance types are:
You might think of the three types as being different levels. The primary beneficiary is the first level. It’s the first or “main” person you choose to receive the death benefit. The second level is the contingent beneficiary. The life insurance contingent beneficiary gets the death benefits only if the primary beneficiary has died, can’t be found, or refuses the inheritance.
What is a tertiary beneficiary in life insurance? The tertiary beneficiary is the last level — if both the primary and contingent beneficiaries aren’t alive, can’t be found, or refuse the funds, the named tertiary beneficiary can receive the benefit.
Keep in mind you’ll also need to specify whether your appointee is a revocable or irrevocable beneficiary. With a revocable beneficiary, you can change the beneficiary at any time. However, you’ll need the beneficiary to sign off on any policy changes when you appoint an irrevocable beneficiary.
How to Designate a Life Insurance Beneficiary
During the application process you will be prompted to fill out a beneficiary. If you want to change your beneficiary once your policy is already in force, Most insurers have a form or website that allows you to make a beneficiary designation and file it with your account and policy information. But how do you decide who to name as your life insurance beneficiary?
How to Choose a Beneficiary for Life Insurance
Deciding who to name as an heir to your life insurance death benefits shouldn’t be taken lightly. Who you list is unique to your life circumstances:
- If you’re married, would your spouse be able to cover the bills or mortgage without your income?
- If you’re married with kids, does it make sense to name your spouse as primary beneficiary and your children as contingent beneficiaries?
- Do you provide financial support for your parents, and would they struggle without your help?
- Did your parents cosign a mortgage or student loans on your behalf?
- Are you a single parent that wants to name your child as your beneficiary?
A good rule of thumb is to think of who would be most financially impacted by your death and name them the primary beneficiary. If you can’t decide, remember that you can have more than one beneficiary – policies often allow you to name as many as ten different individuals.
How to Name a Beneficiary
Naming a beneficiary is a crucial step when buying life insurance. Each company will have its own form or online portal where you can designate your beneficiary. It is also recommended to provide as much information as possible about your chosen designee:
- Full legal name
- Relationship to you
- Mailing address
- Email and phone number
- Date of birth
- Social Security number
- Tax ID number (if charity or organization)
The more information you provide, the easier it is for the insurance company to locate, verify, and pay your beneficiaries.
What Happens If There’s No Beneficiary?
If you’re listed as a life insurance beneficiary you can receive the proceeds without going through the court system.
However, suppose a life insurance policy doesn’t list a beneficiary, and the policyholder dies. In that case, the insurance company releases the funds to the policyholder’s estate — and the estate process can be complicated depending on the circumstances and the applicable state law.
Changing a Beneficiary for Life Insurance
In most cases, your beneficiary designation isn’t set in stone. That’s good news — big life changes like marriage, divorce, or the birth of children can cause you to change your mind. Keeping your policy up to date is crucial to make sure you have the coverage you need and the right people listed to receive the death benefit.
You can typically change your life insurance beneficiary at any time. To make a change, get in touch with your insurance company’s service department or your agent. They will tell you exactly which forms you need and how to do it.
Who Can Change the Beneficiary of a Life Insurance Policy?
The policyholder is usually the only person that can change the beneficiary of a life insurance policy. There are a few exceptions:
- If you give someone a power of attorney to make financial, legal, or medical decisions on your behalf, they may be able to change your beneficiary.
- If you live in a community property state and bought your policy after getting married, you may need your spouse’s permission to change the beneficiary.
Rules can vary by state and insurer, so contact your life insurance company or an attorney if you have questions about updating your beneficiary.
Challenging a Beneficiary Designation
Under normal circumstances, no one can change the named beneficiary after the policyholder passes away — unless the designation is challenged. Challenging, or contesting, the named heir is common if the beneficiary is an ex-spouse or if the beneficiary was changed in the last few months of an older person’s life.
Contesting a beneficiary is a complicated process that typically involves attorneys and court hearings.
Claiming a Life Insurance Policy
For a beneficiary to claim the death benefits of your life insurance policy, you must make sure they know it exists. Give a copy of the policy to your designee, so they have the information available when the time comes.
If you’re the beneficiary of a life insurance policy, here’s what to do:
- Get a certified copy of the policyholder’s death certificate
- Call the insurance agent for the proper documents to fill out
- Submit the required forms and the certified copy of the death certificate to the insurance company
You should receive the funds in about 14 days, although it could take as many as 60 days or more for the insurance company to process the claim and for the money to reach you.
Remember that the life insurance company won’t know the policyholder is dead unless you tell them. You may want to act quickly if you want to use the life insurance proceeds to cover funeral costs or burial expenses. But there is no time limit for claiming death benefits.
Are Your Loved Ones Covered?
A life insurance policy is an excellent option to make sure your loved ones are financially cared for after you’re gone. But for true peace of mind, you must understand beneficiaries for life insurance and name the right one for your circumstances.
You might name your spouse, partner, children, grandchildren, another individual, charity, or corporation to receive the payout when you pass away. Remember to specify primary, contingent, and tertiary beneficiaries and whether you want them to receive all or a portion of the proceeds.
If you don’t have life insurance protection, discover the best coverage for you and your situation with Sproutt’s online quoting tool. There are no strings attached, and we’re here to help you every step of the way.