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Choosing a Life Insurance Beneficiary and How They Can Claim the Policy

When you buy a life insurance policy, you will be given the option of naming one or more beneficiaries who will receive a death benefit if you die. There are almost no rules that limit who you can choose. Furthermore, if you get divorced, you can easily change your beneficiary. The only real restriction is for minors, who must be designated as the beneficiary by a trust or legal guardian in order to receive the death benefit.

You can name anyone as a beneficiary as long as you notify them and provide them with a copy of your life insurance policy. Otherwise, they may not be aware of the need to file a claim or may be unable to do so when the time comes.

Choosing a life insurance beneficiary

Aside from minors, insurers have no restrictions on who you can name as a beneficiary. Furthermore, life insurance beneficiaries are distinct from those named in your will, so the two lists do not have to overlap, though they certainly can.

A person, charity, business, or trust can all be beneficiaries. If the beneficiary is a person, they can be a relative, a child, a spouse, a friend, or anyone else you know. As some agents like to say, you can even name your "secret lover" as a beneficiary on your life insurance policy.

The only exception is if you are married and live in a common property state, also known as a community property state. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are the nine common property states. There are usually life insurance beneficiary rules in these states that require your spouse to waive their rights if you want to name someone else as a beneficiary.

While it is not a legal or insurer requirement, we recommend that the policy owner, person insured, and beneficiary do not all exist as separate entities. This is because the IRS may regard any proceeds from the death of the insured as a gift from the policy owner to the beneficiary, which means they can be taxed.

Similarly, we do not recommend that you make a creditor the beneficiary of your life insurance policy, as is common with credit life insurance policies. Instead, name the beneficiary as the person who will pay the debt. For example, by naming your spouse as the beneficiary, they can choose whether to use the death benefit to pay off the mortgage (and keep living in the house) or to cover a more pressing expense.

What happens if you don’t have a life insurance beneficiary?

If you do not name a beneficiary for your life insurance policy, or if all of your beneficiaries die before you, your estate becomes the beneficiary. This means that the proceeds of your life insurance are subject to estate probate, a lengthy legal process in which your debts are settled and your estate is divided.

We recommend naming beneficiaries and keeping the list up to date because estate probate can take months and creditors can come after the life insurance death benefit. Otherwise, your family may not receive funds when they are needed (for example, to cover your funeral expenses), or their payout may be reduced. This is also why, while you can name your estate as a beneficiary, we do not advise you to do so.

How to designate a life insurance beneficiary

Once you've decided who you want as your beneficiaries, fill out the life insurance beneficiary designation form with their information. A beneficiary designation form is a legal document that the insurer will use to determine who will receive the death benefit if you die during the term of coverage (as well as how much they will receive). This designation supersedes any other estate planning you may have, such as a will, so make sure the beneficiaries listed are those you actually want to benefit from your estate.

Beneficiaries are typically divided into two categories: primary and contingent. A primary beneficiary is your first choice to receive the death benefit if you die. A contingent beneficiary is the backup; they are the person you want to receive the payout if the primary beneficiary also dies. So, if your spouse is your primary beneficiary and you both die in a car accident, the death benefit would be paid to the contingent beneficiary.

It is critical to be specific when designating a beneficiary; otherwise, you may end up with disagreements among your loved ones. For example, simply writing "husband" or "wife" on a life insurance policy could lead to complications if you divorce and remarry. The information required varies depending on the entity listed as a beneficiary, but for a person, you will need the following information:

• Full name
• Address (street address, city, state, zip code, country)
• Phone number(s)
• Social Security Number
• Date of birth

If you have multiple life insurance beneficiaries, you can assign the death benefit to each of them in one of three ways:

While you can assign a dollar amount to each beneficiary, we do not recommend it. Many policies lose value over time, and you don't want to leave money on the table.

You can also specify whether the life insurance proceeds should be paid out in a lump sum or in monthly installments to a beneficiary. This method is typically preferred if your beneficiary is a teenager or if you do not trust them to spend a large sum of money wisely.

How to designate a child or dependent as a life insurance beneficiary

Some insurers will not allow you to directly name a minor as a life insurance beneficiary if the intended beneficiary is a minor. In these cases, you have two options:

• Assign a beneficiary to their legal guardian.
• Use the Uniform Transfers to Minors Act to appoint a custodian for the proceeds. This individual is then designated as the beneficiary.
• Make a trust for the child and name the child as the trust's beneficiary. This has the added benefit of allowing you to specify when the trust proceeds should be released and what they can be used for (for example, education expenses).

If your intended beneficiary is a long-term dependent, such as a disabled family member, you should set up a trust for them as well, even if they are not a minor. They may be disqualified from Medicaid and Supplemental Security Income if they receive more than $2,000 in inheritance. You can avoid this problem by naming a trust as your beneficiary, and the trustee will manage the payout on your family member's behalf.

How to change a life insurance beneficiary

It is simple to change your beneficiary. Simply request a beneficiary change form from your life insurance company, fill it out, and return it to them.

The only time this procedure becomes complicated is when there are irrevocable beneficiaries. Without their express consent, you cannot remove or change the designated payout for irrevocable beneficiaries. This is in contrast to revocable beneficiaries, whom you can remove or change the payout of at any time. Having irrevocable beneficiaries can be difficult if you get divorced and need your ex-permission wife's to change the way your life insurance benefits are paid out. When you fill out a designated beneficiary form, it will state whether the beneficiaries are irrevocable or revocable, so double-check.

The majority of cases involving a contested life insurance beneficiary involve divorce (the former spouse was not removed from the policy) or changes made shortly before death (predatory person convinced senior to make them sole beneficiary). This is why we recommend keeping your beneficiary list up to date and actively informing your family of any changes. The purpose of life insurance is to provide financial security to those you care about, and you don't want the proceeds to be frozen in court for years.

The only time you won't be able to change a beneficiary is if you're declared legally incompetent.

How beneficiaries can claim a life insurance policy

In order for your beneficiary to make a death claim under your life insurance policy, they will need the following information:

• Your death certificate
• The life insurance policy (or a copy)
• A claim form (from the insurer)
• The primary beneficiary’s death certificate (if contingent beneficiary)

If you have multiple beneficiaries, each must file a separate claim with the insurer in order to receive their share of the proceeds.

Ensure that each of your beneficiaries has a copy of your life insurance policy as well as contact information for the insurer. You may also want to give them access to your life insurance account, if the insurer has an online portal, as well as your premium payment records. This reduces the possibility of a disagreement between your beneficiary and the insurer over whether coverage was in place at the time of your death.

Once a life insurance claim is submitted, the insurer will review it and pay the death benefit if there are no problems with the submission. It can take anywhere from a few days to several weeks to pay out life insurance beneficiaries.

While there are some methods for searching for unclaimed life insurance policies, these are usually limited by the insurer or the state. So, take the time to properly notify your beneficiaries, or you could end up paying thousands of dollars in premiums for no benefit to your loved ones.