Losing a family member is never easy. But if your spouse, parent, or other friend left you an inheritance via a life insurance policy, the extra funds can lessen the sting of loss.
Welcome to A Life Insurance Beneficiary’s Ultimate Guide. This article will answer your most common questions about being a life insurance beneficiary, such as:
- Who / what is a life insurance beneficiary?
- Can there be multiple life insurance beneficiaries?
- What happens to a life insurance with no beneficiary?
- Do beneficiaries pay taxes on life insurance policies?
Then, we’ll explore some common questions insurance agents hear from insureds, like:
- What is insurable interest in life insurance?
- Who should I choose as my beneficiary?
- Can a minor under 18 legally be a life insurance beneficiary?
- Can I change my life insurance beneficiary at any time?
- Can my Ex buy a life insurance policy on me?
- How does a life insurance beneficiary file a claim?
And finally, we’ll discuss how to file a claim if you are a beneficiary on someone’s life insurance policy.
Let’s begin with a few definitions.
Who / What is a Life Insurance Beneficiary?
On a life insurance policy, a beneficiary is a “person” named to receive death benefits. Death benefits are an amount of cash that was agreed upon when the contract was written, to be paid out upon the death of the insured.
Know that the “person” can be a human being but can also be an organization, a trust, an estate or a charity.
- The owner of a life insurance policy is the person who pays the premiums.
- The insured is the person whose life is insured.
- The beneficiary receives the death benefit.
We’ll illustrate that with an example in just a moment.
There are Two Levels of Beneficiaries
The Insurance Information Institute (III) says it best: a life insurance policy will have both “primary” and “contingent” beneficiaries.
The primary beneficiary is first in line for the death benefits, if they can be found. Contingent beneficiaries will receive the death benefit if the primary beneficiary cannot be found.
If neither primary nor contingent beneficiaries can be found, the death benefit is paid to your estate.
How a Life Insurance Contract Works
Let’s imagine a working-class family. Dad is a truck driver and Mom is a homemaker. They have two children, Aiden and Dale.
Dad is a healthy non-smoker with no medical problems. Since trucking is a rather risky occupation, Mom buys a term life insurance policy on Dad. She is the owner of the policy and pays the premiums every month. For this example, we’ll imagine she pays $100 a month for $300,000 of coverage.
On the policy, Mom lists herself as the primary beneficiary. If Dad should pass away, she will collect that $300,000. Dad is the insured.
She also lists her two children, equally, as contingent life insurance beneficiaries. That way, if Mom and Dad pass away together in a car accident, the children will split death benefit. Each will receive $150,000.
Now, no one wants to imagine a tragedy. But should the entire family pass away, the death benefit would go to Dad and Mom’s estate. From there, the funds would be used to pay off Mom and Dad’s debts. The remaining funds would eventually be split among next of kin through probate.
- Every state has slightly different laws regarding probate.
- But they all work on the notion that debts must be paid first, and remaining funds can be inherited by others.
Now, let’s consider income tax implications for life insurance beneficiaries. (Don’t worry, there aren’t many.)
Do Life Insurance Beneficiaries Pay Taxes / Are Death Benefits Taxable?
According to the IRS, death benefits are not usually taxable. As a life insurance beneficiary, you do not need to claim benefits on your income taxes.
However, death benefits can be a considerable amount! And any interest those funds earn while sitting in your savings account are income and are taxable. That’s something to keep in mind as you decide how to spend or invest the death benefits.
Now that we’ve explored life insurance benefits from the view of the beneficiary, let’s think about some common questions we hear from insured individuals about their life insurance policy and beneficiaries.
Common Questions About Life Insurance Beneficiaries
Here are the most common questions we hear about life insurance beneficiaries in the office.
“Can I Buy a Life Insurance Policy on Anyone, and List Myself as a Beneficiary?”
No. Licensed insurance agents tend to answer the same questions about life insurance beneficiaries every day, and this is the number one most popular question.
Let’s explore the idea of insurable interest to understand why you cannot make yourself a beneficiary on a stranger’s life insurance policy.
Understanding Insurable Interest
Insurable interest is an economic stake, or interest, in something. That thing could be a human life, a home, a business or a car. You must be economically interested in something to insure it.
So, just as you cannot buy a homeowner’s insurance policy on your neighbor’s house, you cannot insure the life of a stranger. You must have an economic stake in that life.
Let’s think back to Dad and Mom again. Mom and her children all have an insurable interest in Dad, because he is the primary breadwinner.
Dad could also buy an insurance policy on Mom or the kids. And the children could insure their parents. These close family relationships generally pass the test of insurable interest without any problems.
Beyond a husband and wife, or parents and their children, other common examples of insurable interest include:
- Grandchildren and grandparents
- Employers and irreplaceable, key employees
- Ex-spouses who pay child support or alimony
- Domestic partners
- Business partners
The point is that you can buy a life insurance policy and list yourself as the beneficiary on many different people in your life, if your finances depend on them in some way, or would be altered by their death. But you cannot buy a life insurance policy and list yourself as a beneficiary for a stranger.
Now, let’s switch gears and think about life insurance beneficiaries from the view of an insured.
Who Should I Choose as My Beneficiary?
Choose someone you care about or choose a charity that means a lot to you. Remember, if no living beneficiary can be found, those funds will go into your estate to pay creditors and then any leftover funds will be disbursed to your next of kin, if they can be found.
Life Insurance Beneficiary Rules
After the questions about insuring strangers, the next most common questions we hear from insureds are “Who can be my life insurance beneficiary?” and “Are there any life insurance beneficiary rules?”
If you are buying a life insurance policy on yourself, you can make almost anyone the beneficiary. Again, your beneficiary can be a family member, but it can also be an organization you care about, like your church or a favorite charity.
“Can my minor child be a life insurance beneficiary?”
Yes, a life insurance beneficiary can be a minor child. But the insurance company may not release the funds until that child is 18 or 21, depending on the age of majority in your state.
If your life insurance policy is very large – several million dollars – and your child very young, you may wish to assign a custodian to the funds. Pick a person you trust or a group of attorneys; they will oversee those funds until the child becomes an adult.
“Can I Change My Life Insurance Beneficiary and How?”
The policy owner is the only person who can change the beneficiary on a life insurance policy.
Thinking back to our example of Mom and Dad, remember that Mom owns the policy. She signed the paperwork and pays the monthly premiums. Therefore, Dad cannot change the beneficiary, even though he is the insured.
If you own a policy and you need to change the beneficiary, start by reaching out to the insurer. Their contact information is usually listed at the top of the contract.
Historically, insurance companies would send you a form to fill out to change a life insurance beneficiary. Times are changing though, so you might be able to accomplish this online. It all depends on your insurance company.
Information You’ll Need at Hand to Change a Beneficiary
To add or change a life insurance beneficiary, you’ll need to know the new beneficiary’s information. That would include their full legal name, address, contact number, date of birth and social security number (if you know it.)
You’ll also need the life insurance policy number, and you’ll need to prove that you’re the owner of the policy.
To make an organization a beneficiary, it helps if you know their taxpayer ID number. For charities, churches and other non-profit organizations, you’ll need their 501c3 number. Just call the organization and explain your needs, they’ll be happy to provide that information.
Now that we’ve covered life insurance beneficiary questions from the views of an insured individual, let’s think about some questions we hear from beneficiaries.
Less Common (but Important) Questions About Life Insurance Beneficiaries
The following questions are rarer, but still very important to the people who need an answer.
Can my Ex buy a life insurance policy on me?
Here again, the notion of insurable interest comes into play. In theory, if your ex has financial interest in your life, they can insure your life. They will need your permission to do so!
Let’s think again about Dad and Mom, the working-class family we mentioned above. Divorce will not change that life insurance policy. Mom is the owner of the policy, and she had insurable interest in Dad when she signed the contract years ago. If she keeps paying that premium on time, nothing will change.
Ex-spouses can also buy life insurance on one another after a divorce. For example, an ex might be counting on alimony or child support payments to survive. Even though they are not a married couple, there is still a financial interest.
Can I prevent my ex from buying a new life insurance policy on me and listing themself as a beneficiary?
Yes. Any insured individual – the one whose life is insured – will need to sign papers showing consent. Depending on the insurer, they may also ask you for a blood sample or a medical exam (done at their cost not yours.) You can deny all of that.
However, some ex-spouses are on good terms after a divorce. Talk to your ex. If they’re worried about something – like raising the children, paying the mortgage or funding your childrens’ educations without your income – you might agree to be insured.
Or, you always buy a life insurance policy on yourself and make your children the beneficiaries. If your children are very young, and you don’t want your ex to be the custodian of death benefit, name another relative or your attorney as the custodian.
Finally, let’s talk about the claims process for life insurance beneficiaries.
How Does a Life Insurance Beneficiary File a Claim?
The easiest way to file a life insurance claim is to start with the policy documents. On the life insurance contract, you’ll see a phone number and a policy number. Call the insurer, give them your information, and they will get the process started.
The insurer might need a certified copy of the death certificate or a copy of an obituary. Thankfully, modern technology has made the life insurance claims process fast and easy. You can send these documents via email.
They will provide you with a claim number, keep it handy. The insurer might mail you a check or directly deposit the funds to your bank account.
Ultimately, remember that a life insurance policy is a way to create an instant financial estate for someone (or something) you care about. The death benefits aren’t taxable, and only the owner of the policy can change the beneficiary.