If you are thinking about purchasing life insurance, you probably have someone important in mind. A life insurance policy can help provide some financial protection for the people in your life who depend on you.
If you were to pass away while insured, the death benefit of your life insurance policy would go to someone of your choosing called a beneficiary.
Are there life insurance beneficiary rules? Who can be a beneficiary on life insurance policies? Can you name more than one beneficiary? Do beneficiaries pay taxes on life insurance?
These are all great questions. Let’s dive in and explore the answers.
What is a Life Insurance Beneficiary?
After you have been approved to buy a life insurance policy, you will be prompted to select a coverage amount and name your beneficiaries. If you are buying term life insurance, you will also choose the term of your policy (typically between ten to thirty years).
The named beneficiary of your life insurance policy is the person (or people) you designate to receive your policy’s death benefit.
Your beneficiary is likely your reason for buying life insurance in the first place; the person you want to help take care of, even if you’re not around.
Who Can Be a Beneficiary of Life Insurance?
Choosing a beneficiary for your life insurance policy is a big decision.
Here is a list of some possible life insurance beneficiaries you could select, depending on your insurer:
- A spouse or domestic partner
- Your children*
- Your siblings
- Your parents
- Your trust
- A charity
- Your business partners
* Naming minor children as beneficiaries can create complications. Talk to your insurance agent about options, such as creating a trust or making a UTMA designation.
How Do You Pick Your Beneficiaries?
Every insurer has its own guidelines when it comes to selecting a beneficiary, but these are the basic life insurance beneficiary rules:
- A beneficiary does not need to be a person. With some insurers, your beneficiary can be a trust, non-profit organization, or legal entity.
- A beneficiary cannot be a furry friend. Dogs, cats, birds, hedgehogs, and all other pets are considered property and cannot be listed as life insurance beneficiaries.
- You can name multiple beneficiaries to one life insurance policy. This is a great option to consider if you have more than one person or entity to look out for.
- You can name both primary life insurance beneficiaries and contingent life insurance beneficiaries. Primary beneficiaries are the people you ideally want to receive the money from your policy if you die.
You might wonder, what happens if your primary beneficiary passes away before you and they aren’t around to receive your life insurance payout? In this case, for most policies and in most instances, their benefit will be divided amongst any other living primary beneficiaries in proportion to their designated share of the benefit. If there are no living primary beneficiaries when the insured passes away, the policy benefit will be paid to any living contingent beneficiaries.
What If You Pass Away Without a Beneficiary?
If you pass away with life insurance coverage and you don’t have a designated beneficiary, or if none of your chosen beneficiaries are able to receive the death benefit, the money from your policy would then go to your estate and could be subject to probate.
If your death benefit goes to probate, your beneficiaries will not receive your policy’s life insurance payout right away. Additionally, the payout could be contested by creditors before it gets to the people you love. For these reasons, it is crucial to make sure you name a primary beneficiary and provide your insurer with your beneficiary’s current contact information.
How Do Beneficiaries Get Life Insurance Money?
Every insurance carrier has its own payout options, but here are a few your beneficiaries might have:
Lump-Sum Payment: This one is self-explanatory. If a beneficiary receives a lump-sum payment, their portion of the death benefit is sent to them all at once.
Annuity: With this option, your beneficiary would receive their portion of the money from your policy in installments for a defined period of time.
Retained Asset Account (RAA): Some insurers offer the option of an RAA. In this case, the beneficiary’s portion of the death benefit would go into an interest-yielding account, and your designated beneficiary would have a checkbook or debit card connected to the account.
Do Beneficiaries Pay Taxes on Life Insurance Policies?
A life insurance death benefit is typically not considered taxable income, and your designated beneficiary will likely not have to pay taxes on the life insurance payout they receive.
However, if a life insurance payout earns interest, the earnings may be considered taxable income. Therefore, it’s a good idea to consult a tax professional or financial advisor with life insurance questions.
Give the Ones You Love a Little Financial Protection with Bestow
Knowing the life insurance beneficiary rules can help you more confidently choose your beneficiaries. One of the best parts of buying life insurance is letting the people you love know that you have found a way to help provide them with some financial protection should you pass away.
Bestow makes applying for term life insurance exceptionally easy. There are no medical exams. No lengthy phone interviews. The application is online and typically takes only a few minutes to fill out.
Upon approval, you can select your term (up to thirty years), coverage amount (up to $1.5 million), and name your beneficiaries, all before you go to bed. Rates start from less than $1 a day, and if you’re curious, you can get a free quote here in seconds.
Bestow does not give tax or legal advice. The information provided is not intended to offer any tax, legal or financial advice. It is always a good idea to consult your tax, legal and financial advisors regarding your specific situation. Furthermore, this article does not ensure your eligibility for any specific product nor the payment of any claim.