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What is a beneficiary and how do I choose one?

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As you work hard towards financial security and raise a family, you’ll need to plan for their future in the event that you pass unexpectedly. Decisions have to be made regarding how outstanding debt will be handled and who gets your assets — money in the bank, retirement accounts, investments and life insurance policies. A beneficiary is the person (or people) you name to inherit what you leave behind. 

Beneficiaries seem simple enough, but there are many variables to consider. You don’t always have to choose an individual person as a beneficiary — you could also name an organization such as a charity. It would also be smart to have a back-up beneficiary, in case the original intended beneficiary passes with you. In the following article, we help answer the question, “what is a beneficiary?” 

What is a life insurance beneficiary?

A life insurance beneficiary is simply defined as the person or persons you’ve chosen to receive the death benefit of your life insurance policy. For example, if you bought a policy with a $1 million death benefit and named your spouse as the beneficiary, they would receive $1 million if you pass away within the time that your policy is active.

Contingent vs primary beneficiaries

Beneficiaries come with other nuances you need to know about to make sure your assets and benefits are awarded in a way you’re happy with. You can’t guarantee exactly who will be around at the time of your death, but contingent beneficiaries can help cover your bases.

What is a primary beneficiary?

A primary beneficiary is the primary person you expect to receive your death benefit. If you have more than one primary beneficiary, you’ll need to be specific about how you want things divided, such as 60% to your spouse and 20% to your church and 20% to a sibling. 

What is a contingent beneficiary?

What happens if your spouse, who you had named as one of your primary beneficiaries, passes or disappears before he or she can collect? A contingent beneficiary serves as a backup to the primary beneficiary. In the previous life insurance example, you could name your sibling as a contingent beneficiary. If your spouse passes soon after (or with) you, your sibling would receive the 60% portion of the death benefit originally meant for your spouse.

There are a couple of other ways you could set up a contingent beneficiary:

  • Per capita contingent beneficiary: The asset or death benefit doesn’t go to a backup but is divided among your primary beneficiaries instead. This would mean the 60% of the death benefit your spouse was unable to collect is split among your other primaries — the church and sibling in the previous example.
  • Per stirpes contingent beneficiary: Latin for “roots,” your assets in this scenario will pass to your primary beneficiary’s children if he or she is unable to collect.

Revocable vs irrevocable beneficiary

Life insurance policies can also have two other types of beneficiaries — revocable and irrevocable. Let’s take a closer look at the two below.

What is a revocable beneficiary?

In most cases, the last thing you want to deal with is having to ask your beneficiary for permission to add or remove them from receiving your life insurance policy’s death benefit. As you can imagine, asking someone to sign off on getting excluded probably won’t go over well. 

A revocable beneficiary means you can add or remove recipients from your life insurance without needing their authorization. It may come in handy if you separate from a partner and no longer wish to pass money on to them. Or if you’d like to add a co-beneficiary without having to ask for the original’s permission to do so. If beneficiaries are revocable, changes can be made directly with your insurer.

What is an irrevocable beneficiary

Irrevocable beneficiaries are the opposite. You’ll need permission from the person designated to inherit your life insurance policy in order to remove them or add others. You may be wondering why anyone would want to add this complication voluntarily. In most cases however, it’s court-mandated if the life insurance policy is part of a divorce settlement.

Who can be your life insurance beneficiary?

When naming beneficiaries, it’s best to be as specific as possible since you won’t be around to clear things up if there is confusion. Now that you have a better idea of ways to designate beneficiaries, here are some examples of the different types of beneficiaries you can include in your life insurance policy.

Spouses

Spouses are the most common beneficiary. Many people purchase life insurance policies to ensure that their spouse and children are financially taken care of after they pass.

Minor children

Naming children (under the age of 17 or 18) as beneficiaries is possible but can come with complications. It’s typically simpler to name your spouse as a beneficiary if you trust him/her to care for your kids. 

If you do name minor children as the recipient of the life insurance benefit and you pass before your kids are of legal age, they will be unable to receive the money until they come of age. You would need to assign a legal guardian to administer the funds until they are legally an adult. If you don’t, the courts will step in to assign one, but it can be a lengthy and costly process.

Non-relatives

You don’t have to name a family member to receive your life insurance death benefit. Close friends or mentors may also be included. You may name anyone you choose, and even change your mind or switch beneficiaries at any time.

Organizations

Some individuals don’t have a family, or prefer to leave money to their favorite charities, non-profits or organizations. It’s perfectly legal to do so. Be sure to provide the organization’s name and tax identification number.

Trusts

If you’d like your assets managed after you’re gone, you may want to name a trust as the beneficiary. This could be helpful if you have minor children as beneficiaries, but be mindful of the tax implications. It’s best to consult with an advisor if you wish to go this route. 

Can you have more than one beneficiary?

It is a common occurrence to have more than one beneficiary. It’s crucial to be as specific as possible when more than one beneficiary is involved to protect everyone. If the probate courts have to step in to sort things out, costs and time involved can be significant. 

When naming more than one beneficiary, make sure you designate the percentage or dollar amount you’re leaving to each, and identify backup or contingent beneficiaries as necessary.

What if I have no beneficiary?

If you don’t have any beneficiaries to receive your life insurance benefit, a couple of things may happen. The benefit will go to your surviving spouse even if you did not designate them as a beneficiary. Otherwise, the amount will be added to your estate. If there is no one to inherit your estate, the state will claim it.

How to change your life insurance beneficiaries

Changing out your life insurance beneficiaries is a simple process. In most cases, you’ll need to put the changes in writing by filling out a form and signing it. The change of beneficiary form is available online and can be completed online in most cases. You can also download, print, scan and upload or mail it in.

You’ll typically need to provide your life insurance policy number and include the new beneficiary’s legal name, Social Security number, your relationship and the amount of the death benefit you’re assigning to them. Here’s how to change or update your beneficiaries for the top life insurance companies:

CarrierHow to change your beneficiary
AflacComplete a form
Lincoln NationalComplete a form
MassMutualComplete a form
MetLifeComplete a form
New York LifeLog in to your account and complete a form
Northwestern MutualCall the Customer Service Center at1-866-950-4644
Pacific LifeComplete a form
Principal FinancialComplete a form
Prudential FinancialLog in, navigate to “Change Beneficiary(ies)” or the “Forms Library” and fill out the “Request to Change Beneficiary on Life Insurance” form
TIAA-CREF (Teachers Insurance and Annuity Association – College Retirement Equities Fund)Complete a form

How are beneficiaries paid out?

You can decide in advance how you’d like the life insurance to be paid out. Most policyholders and recipients prefer receiving one lump sum. An annuity or installment is also an option. Depending on the amount, you could choose to have the benefit paid out each year over specific periods of time.

Can beneficiaries be denied the death benefit?

There are times a death benefit may be denied. Some of the most common scenarios include:

  • Death of the policyholder was due to suicide, drug use or illegal activities.
  • Policyholder failed to make all the premium payments.
  • Death happened during the contestability period, which is usually the first two years of the policy.
  • The beneficiary is a minor, although it’s not a full denial — a guardian is appointed to manage the funds until the child is of legal age so funds are temporarily unavailable.

Do beneficiaries pay taxes on life insurance?

Rest assured that the amount of your life insurance policy will go to your loved ones in full — as long as you name people as your beneficiaries. The death benefit is not taxable unless it’s paid to a trust or estate.

The takeaway

  • A beneficiary is the person (or persons) who are designated to receive your life insurance death benefit.
  • You should have primary beneficiaries and contingent beneficiaries as a backup.
  • If you have more than one beneficiary, it’s crucial to be as specific as possible with designation amounts.
  • Changing your beneficiaries is simple as long as they are revocable.
  • The life insurance benefit your loved ones receive is not taxable in most cases.

It’s important to plan for the future to make sure things go as smoothly as possible for your loved ones in the unfortunate event of your death. Choosing your beneficiaries and clearly designating who receives what is one of the most important steps you can take.

Cynthia Paez Bowman

Writer

Cynthia splits her time between Los Angeles, CA and San Sebastian, Spain. She travels to Africa and the Middle East regularly to consult with women’s NGOs about small business development.

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