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What is a life insurance beneficiary?

The person or organization designated to receive the death benefit is a life insurance beneficiary.


What is a beneficiary on a life insurance policy exactly?

Life insurance is specially created for beneficiaries. These are people or organizations that will receive the death benefit after your passing.

Once you get a life insurance policy, you need to pay monthly premiums. It is the role of your insurance company to pay for death benefits in case you die unexpectedly. The one that will collect your death benefit is your beneficiary, may it be your spouse, children, or anyone you choose as your beneficiary.

Aside from your close family member, you may also select a charitable institution or business partner. Life insurance holders have a choice. However, states have laws regarding who you can and cannot choose as a beneficiary.

Read on to learn more about life insurance beneficiaries, who can qualify to claim your death benefit, and how to ensure that they will get it in time.

Important Takeaways

  • One can only choose someone with an insurable interest as a beneficiary for your life insurance. It means that a person or people in your life that will suffer financially in the event of your death.
  • It is possible to choose a second beneficiary to safeguard your death benefit if the first one is not eligible to accept it.
  • It is essential to update your list of beneficiaries for every big life event to ensure that the right person will receive it and will not be part of your estate.

What is a life insurance beneficiary rules

Keep these things in mind when naming life insurance beneficiaries:

Life insurance beneficiary rules − Your particular state or the insurance company may restrict who you can name as a beneficiary on a policy. For example, your spouse may have to sign a waiver before you can name someone else as the beneficiary if you’re married.

Last in line? − Who will receive the policy’s proceeds if none of your beneficiaries survive you? Should the assets pass on to your estate? Or would they be better off if you put the life insurance policy in a trust?

How is life insurance paid out to multiple beneficiaries

Payout options

Once the claim is approved, the carrier can complete the payout. Many insurance companies offer multiple options when it comes to payout. The most common payout options include a single lump sum or annuity-based payment.

Lump Sum Payouts

A lump sum allows you to receive the full death benefit once you are the primary beneficiary. This is the simplest way to receive and divide a life insurance policy payout if there are multiple beneficiaries. You and the other beneficiaries will each receive your designated share of the payout. A lump sum payout makes it easier to divide an inheritance on the spot, ensuring each heir gets their fair share.

Annuity Based Payouts

An annuity payout is structured more like an installment plan. Instead of receiving the full death benefit at once, you can obtain smaller payments regularly over an extended period. This can be attractive if you or another beneficiary want to control the money flow and limit overspending. Annuity payouts provide an “income” of sorts, helping to replace the deceased’s income.

Payouts and taxes

Life insurance death benefit payouts aren’t subject to income tax, but interest earned on a policy may be taxable. You should consult a tax professional who can help you minimize your tax liability. In most cases, life insurance policy payouts don’t come with strings attached – once you receive your designated portion of the payout, you can use it however you wish.


Can anyone qualify as a life insurance beneficiary?

It is possible to choose anyone for as long as they have an insurable interest. However, married couples might need to get the spouse’s approval or consent if they want to name someone else as a beneficiary. It depends on your state law. 

Spouse as Primary Beneficiary

Most policyholders choose their spouse as their primary beneficiary to acquire the death benefit for bills and other future expenses such as your child’s tuition fee. There are nine states with community property laws. If you are in one of these states, you must secure your spouse’s consent if you plan to name others as your beneficiary. The following states are:

  • Arizona
  • Idaho
  • California
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

The law only applies if you get your policy right after your marriage. Other states with community property law that is voluntary are Alaska and Tennessee. 

Minor Children as Primary Beneficiary

It is not wise to name minor children as the primary beneficiary. It isn’t easy to get the payout, especially if it’s a large amount of money. There are lots of legal issues that one must undergo in case of your death. Also, it is traumatizing for children to experience the process.

In case you chose a minor as your beneficiary, then the death benefit will go to a trust to oversee by a guardian appointed by the court. This process might lock the death benefits for years until the minor is old enough to decide. The guardian is the one to hold the money until the child reaches the “age of maturity.” It means the age when the child is legally declared as an adult. 

Another option is to designate a trust under your child’s name. The fiduciary of the trust will do the payout by the time the child becomes an adult. 

Non-relative as Primary Beneficiary

In case you can prove that there is an insurable interest, then it is possible to name a non-relative as your primary beneficiary. In the absence of your spouse, you can choose a guardian to take care of your children after your death. Also, you can name your roommate to receive a portion of the death benefit to pay for rent and other bills.

Organization or Charity as Primary Beneficiary

In case your family is financially independent and does not rely on you as their provider, you may choose an organization or charitable institution as your primary beneficiary. The policy accepts organizations like your own business. Cash from the death benefit may help your business cope up financially after your loss. 

Another option is to name a charity or non-profit organization as your primary beneficiary. These are institutions having very tight margins that you may help using the money from your death benefit. 

A Trust as Primary Beneficiary

Policyholders may choose to name a trust as a beneficiary for easy access to death benefits. It is done if you want to consider an unusual choice as your beneficiary, like a pet. Once you choose a trust, then you need to appoint a conservator or the person who will get and disburse the cash on your behalf. Naming a trust to inherit the money as your child’s legal guardian or a pet makes it easier to use the funds to care for them. 

So, there are many different trusts to choose from, like the revocable and irrevocable trusts. You may not need to acquire one depending on the type of assets and what is written on your will. It is good to get the help of an experienced financial planner to guide you on your estate planning. 

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What will happen to life insurance if there is no beneficiary?

What will happen to life insurance if there is no beneficiaryIn case you do not choose a beneficiary, then the insurer will pay out the death benefit to your estate. This process will make the disbursement longer until the court determines who should claim your assets. Also, your family might need to pay tax for your life insurance if it goes to your estate.

Can a life insurance beneficiary be changed after death?

In most cases, no; life insurance beneficiaries can not be changed after death. Unless the policy contract states explicitly that the beneficiary designation can be changed after the insured’s death, the current beneficiary remains in effect until the money is dispersed.

How do you split life insurance beneficiaries?

How do you split life insurance beneficiariesSplitting life insurance beneficiaries is an integral part of estate planning. When you make your policy, you should decide how to split the payout between one or more beneficiaries. To do so, decide who will get what percentage of the death benefit, create a beneficiary designation form, and submit it to your insurance company. You can also select different types of beneficiaries (such as contingent or revocable) depending on your policy type.

Life insurance beneficiary spouse or child

The decision of who should be your life insurance beneficiary can be difficult. Ultimately, whether to designate your spouse or child as the beneficiary depends on your financial situation, personal circumstances, and preferences. Consider how much money would be needed to support yourself, your spouse, and any dependent children in the event of your death, and make sure that you’ve allocated enough to fulfill their needs.

I am beneficiary of a life insurance policy

I am beneficiary of a life insurance policyAs a beneficiary of a life insurance policy, you must contact the insurer holding the policy and submit proof of the insured’s death. You must also provide your name, address, Social Security number, and an original death certificate. Once all of the evidence has been submitted, the insurer will begin processing your claim for benefits.

Who has the authority to change the beneficiary?

It is the policyholder who has the sole power to make changes to its designated beneficiary. A change in the list of your beneficiary is possible anytime. All you need to do is to contact your insurer.

Insurance providers allow making changes in their online portal, while some require you to fill out a form or call to change the beneficiary. One of the most common reasons why policyholders make changes is marriage, divorce, or the beneficiary’s death.

During this time of Pandemic, there might be some changes in how the process is done. It is good to contact your insurers for more information.

How do life insurance beneficiaries get paid out?

The process of paying out requires the submission of important documents and filling out of claim form. Afterward, the beneficiary will get the amount that is equivalent to the insurance coverage you bought. So, if you acquired a $1 million policy, the beneficiary will receive the same amount.

There are two ways on how one can reach the money from the death benefit.

  • Lump-sum: The money is paid in once, and it is one of the most common options of many. It is tax-free and used for many purposes, like funeral expenses and mortgage payments. 
  • Installments or annuity- this process distributes the money monthly, quarterly, or annually. It is a type of payment method that is very easy to manage but may incur interest. 

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Is it possible for a life insurance beneficiary to get denied the death benefit?

There are some scenarios where insurers may deny the claim or payout of the death benefit. Suppose there is a crime involved in getting the money. If the beneficiary murders the policyholder, the “slayer rule” will take effect. If the state proves the crime, then the beneficiary will not get the claim.

The insurance company may also deny a claim if you die because of a health condition you failed to declare during the application and the underwriting process. For instance, if you suddenly die because of esophageal cancer, but you do not mention that you are smoking during the application, the insurer may withhold the death benefit.

Another reason to deny a claim is if you die because of a risky habit that you did not disclose. An insurance company may withhold the whole amount or part of it. It is to recover the amount that is included with your premium.

Moreover, an insurer may not give the claim if you die because of suicide. If it happens within the first two years of the policy, your beneficiary might not get the share. However, most policies have their “suicide clause,” where guidelines are written inside if the policyholder takes his/her own life. The insurance provider may refund all premiums paid by the policyholder.

For mental problems, you may contact the National Suicide Prevention Lifeline at -800-273-TALK (8255). The hotline is available for 24 hours and seven days a week to help those who require free counseling.

How much does life insurance cost?

If you choose a life insurance beneficiary do they pay taxes on life insurance proceeds?

The good news is that the money from life insurance is tax-free. Hence, there is no need to declare it on a tax return. Although it is tax-free, there are instances when the beneficiary might need to pay taxes to get the payout.

Income taxes may be required in case payment from the cash value life insurance was not given immediately after the policyholder’s death. The money from the cash value will have an accrued interest. It applies if the death benefit chooses to receive the money on an annuity rather than a lump sum.

The payout for life insurance may also go into the policyholder’s estate than to its beneficiary. When it happens, the one who will inherit the estate may need to pay an estate tax.

The main objective of getting life insurance is to ensure that your beneficiary will get the money right after passing away. That is why it is necessary to make sure that they will get it right away. You can do it by updating your policy regularly after every vast life event. Also, it is vital to becoming specific with the details about your life insurance and how you want the beneficiary to spend the money.

Moreover, getting the help of a certified insurance planner for the best way to designate your death benefit may help you safeguard your family’s financial security.

 Frequently Asked Questions

Who should be your life insurance beneficiary?

Your life insurance beneficiary should be someone you trust to use the funds for their intended purpose. This could be a spouse, relative, or even a charity. When choosing your beneficiary, select someone who will not face any legal restrictions when accessing the funds. Furthermore, remember to update your beneficiary if something in your life changes.

What rights does the beneficiary of a life insurance policy have?

A life insurance policy beneficiary has the right to receive the death benefit when the insured person passes away. They also have the right to change the policy, subject to certain restrictions and depending on the type of policy involved. Lastly, depending on the type of policy and in some states, a beneficiary may be able to sue for wrongful denial of benefits if they believe that a valid claim was wrongfully denied.

Does the beneficiary get all the life insurance money?

Yes, the beneficiary of a life insurance policy will typically receive all of the money from the policy upon the insured's death. This money provides financial protection for their loved ones and can be used however the beneficiary chooses.

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About Coach B.

After starting his financial career with Phoenix Home Life Insurance Company back in 1992, Scott decided he wanted to provide people with an easier and more enjoyable way to buy life insurance. That was the start of Coach B. Life Insurance, whose mission is to be transparent, honest, and helpful to customers — without ever bugging or pushing them.

In the years since then, he has worked tirelessly to improve the process of shopping for insurance. His goal is to make sure that everyone who comes to Coach B. — whether they end up buying a policy or not — has the best possible experience.

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