A life insurance beneficiary is a person who will receive a certain amount of money upon their death as a result of their life insurance policy.
When you purchase a life insurance policy, choosing an heir is one of the most important steps because it is the only legal way to specify who will be the beneficiary if you die during the policy’s life.
If you are the beneficiary of a life insurance policy, you need to be aware of how you pay for the policy, what options you have, and what can complicate the process. Read on to find out more about how to call or become the beneficiary of a life insurance policy.
What Is a Life Insurance Beneficiary?
It is possible that you can name more than one heir when you buy a life insurance policy. If you die during the term of the policy, the heirs will receive a fixed amount of money or a series of payments based on the amount of coverage you have purchased.
It is up to you as the policyholder to decide how to transfer the money:
- The entire amount of money can be distributed to two or more people, depending on how you wish to do it.
- In some cases, people prefer to leave money to a charity when they die, and you can choose any valid charity that you wish.
- There is no problem naming a trust to receive the money from your insurance policy if you have one or want one.
- In order to receive everything, you can name one person who will receive it all.
As the parent of a minor child, you can name a guardian for them if that is what you feel is necessary. If you plan on doing this, it is important to know that in most states an adult guardian must be appointed to manage minor assets. The process of appointing a guardian can be time-consuming and costly.
Keep in mind
It is important to note that if you have been designated by the beneficiary to receive money from a life insurance policy and your loved one has passed away, you must contact the insurance company and provide a death certificate so that the company can begin the process of making the payment.
It is possible to speed up the process of the inheritance process by creating an escrow account or trust for your children. The money is deposited in your children’s trust, and it is then managed by a trustee until they reach the age of majority or when you decide to let them reach that age.
It is important to remember that if you forget to name someone, your estate becomes the “de facto”.
Names of Insurance Beneficiaries?
Please be sure to provide accurate information to the people who are going to receive the insurance money when naming them. For example, you will need to have your social security number, your date of birth, and your contact information. It is imperative that you double-check the application before submitting it to make sure that everything is correct. If it is not, your heirs may receive the money in the wrong place or there may be legal issues that need to be dealt with.
Imagine, for example, the situation where you enter “spouse” as your beneficiary and you get divorced two years later and then remarry without changing your policy. Upon your death, both your ex-spouse and your current spouse will be able to claim the money.
As “spouse” is unclear, you are creating a legal situation where the payments may be delayed. One was your legal spouse when you passed away, and the other was your legal spouse when you created the policy. A fight over money is bound to happen, along with all the legal fees, stress, and heartache that usually follow a fight.
Beneficiaries primary and contingent
A contingent beneficiary is an individual who is able to receive some or all of the money from a life insurance policy in the event the primary beneficiary (or beneficiaries) cannot be found or are deceased. A contingent beneficiary is someone who receives the money if the primary beneficiary (or beneficiaries) die.
Keep in mind
Identify the amount (as a percentage) of money that each of the people should receive if more than one person is named.
For example, if you buy a policy with a maximum benefit of $2 million and you name your spouse as the beneficiary, if you die during the term of the policy, your spouse will receive the full amount of the policy.
When your primary beneficiary dies, you want to make sure the money passes on to your children. You add your three adult children as contingent beneficiaries to the policy and divide the money equally between each of them. In this way, your children would receive one-third of the money after your death if your spouse predeceases you.
It is also important to remember when naming beneficiaries that you should consider whether to name them per capita or per lineage. These types of beneficiary designations dictate how the money should be distributed when one or more of your beneficiaries dies and no additional contingent beneficiaries are listed in your policy.
Per capita (“per head”) is usually the default designation. This means that you don’t have to go into detail about every event that could occur. Instead, each living beneficiary receives an equal share. For example, if you have three adult children and one predecesses you, the remaining two receive one-half face value instead of one-third.
You will receive your amount if one of your beneficiaries dies before you if they have children if you elect by kinship. In the case of a deceased adult child, your two grandchildren would receive the one-third your son was supposed to receive if you were survived by two children. Each grandchild would receive a sixth of the money.
Per Stirpes and Per Capita
It is also important to remember when naming beneficiaries that you should consider whether to name them per capita or per lineage. These types of beneficiary designations dictate how the money should be distributed when one or more of your beneficiaries dies and no additional contingent beneficiaries are listed in your policy.
You don’t need to go into detail about each event that might occur since the term per capita (“per head”) is usually used as the default designation. Thus, you do not need to go into detail about all the events that could occur. Instead, your settlement is distributed equally among all your living beneficiaries. Suppose you have three adult children and one of them passes away before you do, but the remaining two receive only half of the face value rather than one-third. The term per capita (“per head”) is usually used as the default designation, which means that the settlement is distributed equally among all your living beneficiaries.
A person who chooses the per stirpes option and dies before you do will leave their inheritance to their children when he or she passes away. In the event that one of your three adult children dies before you, and is survived by two children, a per stirpes arrangement would allow your two grandchildren to share one-third of the money your adult child was to receive. Each grandchild would receive one-sixth of the money. If, on the other hand, you had chosen the per capita option, your two grandchildren would only receive one-quarter of the money, since they would be splitting it with their one surviving parent. For instance, if your estate is worth $100,000 and you have three children, each child would inherit $33,333 under the per stirpes arrangement. If one of those children dies before you and is survived by two children, each of those grandchildren would inherit $11,111 under the per stirpes arrangement.
Keep in mind
As a matter of fact, life insurance can prove to be a great estate planning tool. However, it may not be the best choice for you and your circumstances. The best way to ensure that your family will have what they need after you are gone and your assets go to the people you wish to be inherited by an estate planning attorney is to speak with one of them.
Some beneficiary designation forms will have a box you can check to select per stirpes. If no box exists, check with your agent to see if you can write per stirpes in.
Life Insurance Beneficiaries Can Be Changed?
As part of the life insurance application process, you are required to choose at least one beneficiary. However, this does not mean that you cannot change them later. If you are the owner of the policy, you can change or add people at any time.
For example, you may have some changes in your life that cause you to name someone else. If you are going through a divorce or wedding, it may be wise to designate someone else. The birth of a child is another good reason to review your policy. If you have another reason to change your policy, that is another reason to do so.
If, however, you have set up an “irrevocable beneficiary” for your policy, you will need to obtain the consent of that beneficiary before you make any changes to the policy (they will be required to sign the policy change form).
It is important to note that in some cases, your insurance company or state may restrict who you can name on your policy. For instance, couples living in states with community property may be required to get their spouse’s consent before they can name another person on their policy.
Keep in mind
Your insurer will provide you with a “beneficiary change form” if you want to change the beneficiary or add an heir to your policy.
When it comes to life insurance policies, do beneficiaries have to pay taxes?
Generally, life insurance death benefits are not considered taxable income when they are taken as lump sums, although there are certain cases where you may have to pay some taxes as a result.
Any interest paid above the face value of the money received as monthly payments or as an annuity, for example, is taxable income if they are received as monthly payments. Also, if the money is paid to your estate rather than to an individual, it may be subject to estate taxes. The good news is that you don’t have to pay any estate taxes unless you have an estate worth more than $11.7 million.
What you need to know
- The proceeds of life insurance policies are generally not taxable, but in some cases they may be taxable depending on the circumstances.
- When a person dies during the term of a life insurance policy, the beneficiary of the policy will receive the death benefit of the policy.
- It is possible to name a person or trust and designate more than one beneficiary, including both primary and contingent beneficiaries.
- Before you do anything else, make sure you are familiar with your state’s life insurance laws and how to handle naming minors in your policy.
- In order to make sure your beneficiaries are easy to locate and minimize disputes, you must provide accurate identifying information about them