Have you designated a life insurance beneficiary? Providing for loved ones upon your death remains a priority for many people. That is why the selection of beneficiaries is important. Failure to do so can bind death benefits to the probate court, and court costs can reduce how much your loved ones receive.
What is a life insurance beneficiary?
A life insurance beneficiary is the person or entity you name to receive the death benefit from the policy. Beneficiaries can be one or more people, the trustee of a trust you set up, a charity or your estate. If you do not name a beneficiary, the death benefit is automatically paid to your estate.
There are two types of life insurance beneficiaries: primary and contingent. The primary beneficiary is the person or entity named in the policy to receive the death benefits. The contingent beneficiary will receive the death benefit if the primary beneficiary cannot be found.
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How does a life insurance beneficiary work?
When a person buys a life insurance policy, he or she chooses a person, person or entity to receive the death benefits upon the death of the policyholder. This could be the person’s spouse and/or children, other loved ones, or even a charity. When the policyholder dies, the beneficiaries file a claim to receive their share of the death benefits.
What are the rules for the beneficiary?
While the choice of life insurance beneficiaries is up to the policy owner, there are some basic guidelines to follow to ensure your wishes are met.
1. You don’t need to name the beneficiaries.
Life insurance beneficiaries are not required, but not naming beneficiaries can make it difficult and time-consuming for your heirs to receive the policy’s death benefits. Even if you specify beneficiaries in your will, it is important to name them on the insurance policy as well.
2. You can name as many beneficiaries as you want.
This means that you can name your spouse or partner, your children, and other loved ones to receive the death benefits of the life insurance policy.
3. Your state may require you to name your spouse as a beneficiary.
If you live in a community property state, check your state’s requirements regarding life insurance benefits. Your spouse may be entitled to a certain portion of the death benefits of any life insurance policy.
4. Changes in life insurance beneficiaries must be made by you.
It is important to keep your life insurance beneficiaries updated. If there are major life changes such as divorce or death, you are responsible for updating your beneficiaries to reflect these changes. Otherwise, your death benefits may go to someone you didn’t want to receive them. Making changes to your will will not automatically carry over to your life insurance benefits.
Does the beneficiary get all the life insurance money?
In most cases, the beneficiaries receive the full amount of life insurance death benefits. In some cases, they must pay estate tax on life insurance payments if the policy owner’s property, including life insurance payments, exceeds the specified amount. According to the Internal Revenue Service, that amount for 2024 is $13.6 million. Because of this, many beneficiaries do not have to pay estate tax on a life insurance payout.
If the beneficiaries choose interest-based payments instead of a lump sum, they will have to pay interest tax.
Who should be your life insurance beneficiary?
When choosing your life insurance beneficiary, consider who you want to benefit from after your death. For many people, it is a spouse, children, grandchildren or other loved ones. However, it could be another person or people you care about.
Can a minor be a beneficiary of life insurance?
Yes, minors can be your life insurance beneficiaries. However, they must be 18 or 21 (depending on your state) to receive death benefits. Therefore, it is important to name the minor’s caregiver as the beneficiary or establish a trust for the minor and name the trust as the beneficiary. With a trust, you must choose a trustee to manage the funds for the minor until he or she reaches 18 or 21 years of age.
The bottom line
Choosing life insurance beneficiaries is important to ensure your loved ones receive the death benefits you want them to have. This may include your spouse, children or other loved ones. Make sure you regularly update your life insurance beneficiaries so that your death benefits go to the right people.