What is a Beneficiary?
A beneficiary is a person who receives the death benefit of a life insurance policy. When someone buys life insurance, they name a beneficiary who they want to receive their death benefit (a lump sum of money paid out by their insurance company) when they die, as long as their policy is still active at the time.
What a beneficiary gets
Whenever someone buys life insurance (the policy owner or insured), they get to choose two things: their death benefit and their beneficiary or beneficiaries.
The death benefit is a sum of money (usually, $500,000 to $1 million) that the life insurance company will pay out at the time of the insured’s passing.
The beneficiary is the person, people, or entity that gets that payout. People usually name one or multiple people as the beneficiary of their life insurance policy. If they don’t name a beneficiary, their death benefit goes to their estate.
Once the beneficiary receives the death benefit, they can use it however they want. If the beneficiary was the insured’s partner, they might use it to keep making mortgage payments or to cover their kids’ tuition, for example. If the beneficiary was a business partner, they can use the money to keep things afloat as they find people to take over the responsibilities of the now-deceased individual.
The death benefit the beneficiary receives isn’t subject to taxes.
Who can be a beneficiary
Most people buy life insurance and name people as the policy’s beneficiary, but that’s not your only option. A beneficiary can be:
An individual person such as a spouse, a child, a parent, a friend
Multiple people, with the death benefit distributed per the policy’s agreement (e.g., by percentage)
An estate
A charity
A corporation
A charitable organization or an NGO
The custodian of a Uniform Transfers to Minors Act (UTMA)-compliant account
The trustee of a trust fund you’ve set up
Those last two options are good choices for any minors you want to receive your death benefit (e.g., your kids). Technically, minors can’t receive a death benefit. But with a trust or an account that falls under the UTMA, you can ensure they get the money you want to leave them.
Designating a beneficiary
During the application process, you will be prompted to fill out a beneficiary. Naming a beneficiary is a crucial step when buying life insurance (most people tend to think your spouse is automatically your beneficiary but that’s not correct).
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)
Types of beneficiaries
In addition to naming a beneficiary, it is also possible to designate the type of beneficiary. The most common beneficiary life insurance types are:
Primary
Contingent
Tertiary
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.
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.
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.
How beneficiaries get a death benefit
The main triggering event for beneficiaries to receive the death benefit is the insured’s passing. But the life insurance company won’t necessarily track them down and hand them a check.
They will need to file a claim with the life insurance provider. To do so, they will usually need:
The insured’s death certificate
A copy of the insured’s life insurance policy
A completed claim form (this is usually available on the life insurance provider’s website)
If a life insurance policy has multiple beneficiaries, each beneficiary will need to submit a claim.
The funds should be received 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 the beneficiary. It’s important to remember that the life insurance company won’t know the policyholder is dead unless they are notified of it.
