What Is a Life Insurance Beneficiary?


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ByMelissa Wylie
Edited byCasie McCoskey
ByMelissa Wylie
Edited byCasie McCoskey

Updated: June 2, 2024

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A life insurance beneficiary is someone specifically named to receive the death benefits from a life insurance policy. It can be an individual, trust, charity or estate. You may also tailor the life insurance beneficiary designation to your circumstances and opt to name primary, contingent and tertiary beneficiaries. You also determine whether to have a revocable or irrevocable beneficiary.

Although it's also possible to not have a beneficiary in a life insurance policy, the designation helps ensure that the death benefits are handled responsibly and directed according to your wishes.

Who Can Be a Life Insurance Beneficiary?

Choosing a life insurance beneficiary should be done with careful consideration of the policyholder's financial goals, family dynamics and legal concerns. Understanding the various options and their implications can help you make an informed decision that aligns with your intentions and needs.

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    Individuals

    You can name family members, friends or anyone with an insurable interest as a life insurance beneficiary. Naming an individual as a life insurance beneficiary allows you to provide financial support to those who may depend on you, either financially or emotionally.

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    Trusts

    Trusts are legal entities you can name as life insurance beneficiaries to manage your assets, including life insurance proceeds. By designating a trust as your life insurance beneficiary, you can exert greater control over how the funds are used, ensuring that they are distributed according to specific guidelines or utilized for particular purposes, such as education or care for a special needs family member.

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    Charities

    You can also name nonprofit organizations as beneficiaries of life insurance benefits. This option allows the policyholder to leave a lasting legacy, supporting a cause or organization they believe in.

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    Estates

    When life insurance benefits are paid to an estate, they may be subject to probate. This process can be time-consuming and costly. Additionally, the distribution of funds may not align with the policyholder's specific wishes, as they will be distributed according to the state's laws.

Types of Life Insurance Beneficiaries

Life insurance policies offer flexibility in naming beneficiaries, allowing policyholders to align the distribution of death benefits with their specific needs and goals. We highlight the different types of beneficiaries below:

  • Primary Beneficiary: The primary beneficiary is the main recipient of the death benefits. This could be a spouse, child, business partner or any individual with an insurable interest — which refers to a financial or personal stake in an asset or a person's life, where the loss or damage of the asset or the death of the individual would result in a financial loss or hardship. The primary beneficiary is the first in line to receive the benefits, so it's wise to consider their financial needs when making this designation.

  • Contingent Beneficiary: Also known as a secondary beneficiary, the contingent beneficiary receives the death benefits if the primary beneficiary is unable to, such as in the case of predeceasing the policyholder. Naming a contingent beneficiary provides a backup plan, ensuring the benefits are still directed according to your wishes if the primary beneficiary is unavailable.

  • Tertiary Beneficiary: A tertiary beneficiary is a third-level beneficiary, rarely used but available in some policies. This life insurance beneficiary designation provides an additional layer of security, allowing for further distribution planning if the primary and contingent beneficiaries cannot receive the benefits. While not commonly utilized, the option to name a tertiary beneficiary can be valuable in specific scenarios, such as extensive estate planning or when there are multiple layers of potential recipients.

  • Irrevocable Beneficiary: An irrevocable beneficiary is one whose rights to the death benefits are vested, meaning the policyholder cannot change or remove this beneficiary without their consent. This type of life insurance beneficiary provides assurance to the recipient but limits the policyholder's flexibility in making changes.

  • Revocable Beneficiary: Unlike irrevocable beneficiaries, revocable beneficiaries can be changed or removed by the policyholder at any time without consent. This allows for greater flexibility in adjusting the policy to reflect changes in life circumstances or financial goals.

  • Minor Beneficiaries: Naming minor children as life insurance beneficiaries requires careful planning, as legal challenges can arise. Using trusts or legal guardians can facilitate the transfer of benefits to minors without legal complications.

Understanding the different types of life insurance beneficiaries and their roles can help craft a strategy that ensures the benefits are used as intended and support the right individuals or entities.

What Happens Without a Life Insurance Beneficiary

Understanding what happens if no beneficiary is named on a life insurance policy can help you avoid potential pitfalls. These may include:

  • Probate Process: If no life insurance beneficiary is named, the death benefit may become part of the insured's estate and go through probate. Probate is a legal process that includes validating the deceased's will, inventorying assets, paying off debts and taxes and distributing remaining assets to rightful heirs and beneficiaries. The whole ordeal can cause delays in the distribution of funds and may involve legal fees.

  • Legal Disputes: Potential legal battles among heirs may arise without a named life insurance beneficiary. Different family members or entities may claim rights to the death benefits, leading to disputes that require legal resolutions.

  • Lack of Control: When no life insurance beneficiary is named, the court decides the distribution of the death benefits, possibly against the insured's wishes. The distribution will follow the state's intestacy laws, which may not align with the policyholder's intentions. By not naming a beneficiary, the policyholder loses the opportunity to direct the funds in a way that fulfills specific intentions.

  • Potential Tax Implications: Death benefits paid to an estate rather than a named life insurance recipient may be subject to estate taxes or other tax liabilities.

Remember that naming a beneficiary in a life insurance policy is not merely a procedural step; it can be a fundamental part of your financial and estate planning.

How Life Insurance Beneficiaries Get Death Benefits

Understanding the process of receiving death benefits from a life insurance policy can help beneficiaries ensure they receive the financial support the policyholder intended.

Here's an overview of the process, detailing each step and what life insurance beneficiaries can expect.

1
Claim Submission

The first step in receiving death benefits is filing a claim with the insurance company. This typically involves submitting a claim form, a copy of the policyholder's death certificate and any other documents the insurance company requires.

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Verification

Once the claim is submitted, the insurance company verifies the claim and policy details. This may include confirming the validity of the policy, the cause of death and the beneficiary's identity. The verification process ensures the claim is legitimate and the benefits are paid to the correct recipient. The insurer may request additional information or documentation to complete the verification.

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Payment Options

After verification, the life insurance policy beneficiary can choose how to receive the death benefits. The options may include:

  • Lump Sum: This is a one-time payment of the entire death benefit. This option provides immediate access to the funds. It can help cover immediate expenses or be used however the life insurance beneficiary sees fit.

  • Annuities: This option involves structured payouts over time, providing regular income. As they provide ongoing support, annuities can be suitable for those seeking long-term financial stability.

  • Installments: Similar to annuities, installments provide death benefits in periodic payments over a specified period.

  • Retained Asset Account: Some insurers may offer a retained asset account, where the death benefit is held in an interest-bearing account, and the life insurance beneficiary can access the funds as needed.

Life Insurance Beneficiaries and Taxes

Generally, life insurance death benefits are not subject to federal income taxes, allowing beneficiaries to receive the full amount as intended by the policyholder. However, certain situations may trigger tax liabilities. For example, if the death benefits are paid in installments or held in an interest-bearing account, the interest earned on the payout may be subject to income tax.

Additionally, if the policyholder's estate is named as the life insurance beneficiary and is subject to estate taxes, the death benefits may be included in the taxable estate. In some states, inheritance taxes may also apply, depending on the relationship between the life insurance policy beneficiary and the deceased.

Tips for Choosing a Life Insurance Beneficiary

Choosing the right life insurance beneficiary requires careful consideration of various factors, including the needs and goals of potential recipients, legal and tax implications and the overall financial plan. Here are some essential aspects to consider when selecting a life insurance beneficiary:

1
Assess Needs and Goals

Consider the financial needs, family dynamics and long-term goals of potential life insurance beneficiaries. Think about who relies on you financially and how the death benefits can best support them. For example, if providing for a child's education is a priority, naming a trust for that purpose might be appropriate.

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Consider Multiple Beneficiaries

Consider life insurance with multiple beneficiaries if you have several individuals or entities you wish to support. You can specify the percentage of the death benefit each should receive, allowing for a tailored distribution that reflects your wishes. Naming contingent beneficiaries also provides a clear path for distributing benefits if the primary beneficiary is unavailable.

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Seek Professional Guidance

You may consult financial or legal professionals specializing in estate planning or life insurance. They can provide personalized guidance based on your specific situation, helping you navigate complex issues such as taxes, legal considerations or unique family dynamics.

Common Mistakes Related to Life Insurance Beneficiaries

Mistakes in selecting life insurance beneficiaries can lead to unintended consequences, delays and legal challenges. Here are some common errors you may want to avoid:

  • Not Updating Beneficiaries: Failing to update life insurance beneficiary designation after significant life events such as marriage, divorce or childbirth can lead to unintended recipients. Regular reviews and updates ensure the policy reflects your current situation and intentions.

  • Naming Minors Directly: While it may seem logical to name a minor child as a life insurance beneficiary, legal challenges may arise when minors are named directly. Minors may not have the legal capacity to receive the funds, leading to court-appointed guardianship or other legal complexities. Utilizing a trust or naming a guardian can provide a more effective way to leave benefits to a minor.

  • Lack of Specificity: Vague or general naming of life insurance beneficiaries can lead to confusion and potential disputes. For example, naming "my children" without specifying names may lead to disagreements among potential recipients. Identifying beneficiaries by name and relationship helps avoid ambiguity and ensures the distribution of benefits as intended.

  • Failure to Communicate With Beneficiaries: Naming a life insurance beneficiary without informing them can lead to delays and confusion. If a beneficiary is unaware that they are a recipient, they will not know to start the claims process in the event of the policyholder's passing. Communicating with life insurance beneficiaries about the policy, where it's located and what to expect can facilitate a smoother process when the time comes.

When naming your life insurance beneficiaries, intentionality and clarity will help you avoid pitfalls that may delay or nullify the benefits you hoped to leave behind.

FAQ About Life Insurance Beneficiaries

Below, we address some of the most frequently asked questions to provide clarity and guidance on life insurance beneficiaries.

What is a beneficiary for life insurance?
Can anyone be a beneficiary on a life insurance policy?
Who should be a beneficiary of life insurance?
Can the owner of a life insurance policy be the beneficiary?
Can a minor child be named as a beneficiary?
What happens if the primary beneficiary dies before the insured?
What is a secondary beneficiary for life insurance?
Do you need a Social Security number for a life insurance beneficiary?
Can a beneficiary be changed after a policy is issued?
How long does it take for a beneficiary to receive the death benefit?
Can you change your life insurance beneficiary at any time?
Can a life insurance beneficiary be changed after death?

About Melissa Wylie


Melissa Wylie headshot

Melissa Wylie is a Content and SEO Manager at MoneyGeek. Melissa has worked in the financial content space since 2018 and has spent much of that time focused on all things small business.

Prior to joining MoneyGeek, Melissa held SEO positions at Bankrate and LendingTree. Melissa’s work has also appeared on LendingTree-owned websites ValuePenguin and MagnifyMoney.

Melissa began her career at American City Business Journals in 2015 as a reporter for the company’s women-focused publication Bizwomen. Melissa has a Bachelor of Arts in Journalism from the University of North Texas. Melissa relies on her foundation in journalism to craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.

Melissa's other work can be read on LendingTree and Bizwomen.