The beneficiary of a life insurance policy is the person who gets the money when it is claimed upon the death of the insured person. The amount that they will be paid is known as the death benefit of the policy. The death benefit is the payout paid by the insurance company when the insured passes away.
If you own a life insurance policy or you are thinking about buying one, you must be very careful that you name your beneficiaries correctly. If you don’t, you risk subjecting the payout to taxation or other issues like estate recovery through medicare. It is important to know that more than one person or entity may be named as the beneficiary to one contract, and you can name back up beneficiaries in case that person passes away before the insured person.
Beneficiaries Are Designated By The Owner
The beneficiary is designated by the owner of the contract. Generally speaking, the owner has great leeway to designate whomever they wish as beneficiary, so beneficiaries have wide ranges of relationships to the insured. The only requirement is that a beneficiary can only be named ifs an insurable interest exists, meaning the beneficiary needs to benefit from the existence of the insured, either emotionally or materially.
Beneficiaries can be changed at any time by the owner, but only the owner can make this change.
The beneficiary of a policy is the person that will benefit from the money being paid out. Since life insurance can pay a very substantial amount of money out to people, it is important to choose a beneficiary wisely. Choose people are will benefit the most from the money, usually, those who are harmed the most financially by the death of the insured person.
Beneficiaries are first chosen on the life insurance application, but can later be changed with a form, or letter of instruction submitted to the insurance company. If you need a beneficiary change form, be sure to contact your life insurance company.
Typical Relationship Of Beneficiaries To The Insured
Common beneficiaries to life insurance contracts are spouses and children of the insured. However, other blood relatives such as grandchildren, friends, employers or business partners, trusts, and even charities are other examples of people and entities are sometimes named beneficiaries. Life insurance is purchased for a reason. It protects the financial interests of a person or people that survive the death of the insured person. Usually, these are family members that depend upon the income from the insured person to survive. It is not uncommon for it to be a business relationship though, where the death of the insured person would potentially cause material financial harm to the business. Because of this, a business partner or even employees, or owners, are often beneficiaries to life insurance policies.
Changing A Beneficiary
A beneficiary to a life insurance contract can normally be changed by the owner any time before the insured’s death, while the contract is in force. This is normally a simple process, requiring only a short beneficiary change form submitted to the insurance company. Sometimes a letter of instruction will be accepted if it is signed by the insured, but it may need to be notarized. A life insurance agent may also be able to assist in changing a beneficiary.
Beneficiaries are not required to agree to become beneficiaries, nor are they able to prevent themselves from being revoked as a beneficiary. While almost all life insurance beneficiaries are revocable, non-revocable beneficiaries can exist (meaning they can not be changed after being named) on some life insurance contracts.
Primary, Secondary, And Contingent Beneficiaries
Life insurance contracts allow for multiple layers of beneficiaries to be named, in the event that a named beneficiary predeceases the insured. The first line of beneficiaries is known as the primary beneficiaries. Assuming at least one primary beneficiary is alive at the time the insured dies, 100% of the death benefit will be paid to primary beneficiaries.
In case no primary beneficiary is alive at the time of the insured’s death, it is wise that the owner name another line of beneficiaries, known as secondary beneficiaries. The secondary beneficiaries will receive 100% of the payout if at least one is remaining at the time of the insured’s death.
It is also possible for the owner to name yet another layer of beneficiaries, known as contingent beneficiaries. Contingent beneficiaries will only receive the death benefit payout if no primary or secondary beneficiaries remain alive when the death of the insured occurs.
A life insurance owner can typically designate any percentage of the total payout they wish to an unlimited number of beneficiaries. For instance, if an insured has four children, the contract owner could name each child a 25% primary beneficiary, meaning each child will receive 25% of the total death benefit upon payout. If two children were to pass away before the death benefit was paid, the remaining two will receive a proportional amount, so each will now receive 50% of the total benefit in this scenario. If no children are remaining, the death benefit will be paid to any named secondary beneficiary. If no named beneficiaries are alive at the time of the insured’s passing, the death benefit will typically be paid to the estate of the insured.
Per Stirpes and Per Capita
Per stirpes, and to a lesser extent, per capita are two other common methods of distributing a death benefit amongst beneficiaries. Per stirpes literally translates to “by branch”. Typically this will be seen when an owner names the insured’s children as beneficiaries per stirpes. This means that whatever percentage of the total death benefit is relegated to each child, if that child were to pass away, instead of having the death benefit being distributed amongst the other children, the family or “branch” of the deceased child will receive the funds. Practically speaking this means that the amount of the death benefit earmarked to the deceased child will now be broken up evenly amongst any children of the deceased child, aka the grandchildren of the insured who were offspring of the deceased beneficiary.
A per capita distribution will divide funds between all living members in each designated “branch”. In the same two-child example, even if both children are still living, if they have borne any children themselves, they will split the death benefit in equal proportion with every child. For instance, if one child has borne two grandchildren, and the other has borne none, there are now 4 beneficiaries to the contract who will keep 25% each of the death benefits.
Always Name A Beneficiary
One of the great advantages of life insurance is that the death benefit can be passed to the beneficiaries tax-free in most instances. If no living beneficiaries are named the death benefit will be paid to the estate, and it becomes subject to taxation at this point. It can also be subject to certain clawbacks, such as lawsuits or liens, or medicare recovery. The estate may also not reach those that the insured would most like to enrich with the death benefit since it is often divided by courts. For these reasons and more, it is very important that a beneficiary is always named for every life insurance contract so that the money reaches exactly who it is intended to reach with the lowest chance of being taxed.