You could argue that life insurance means nothing without the beneficiary. Sure, it’s the policyowner who initiates the coverage and pays the premiums. But assuming that the insured doesn’t let the insurance lapse or sell it in a life settlement, the beneficiary is the one who ultimately benefits from that life insurance policy.
So, what is a life insurance beneficiary? A life insurance beneficiary is an individual or entity that has been designated to receive a death benefit on a life insurance policy. The designation is made with the insurance company and is not affected by anything in the policyholder’s will. Any given life insurance policy can have one or more primary beneficiaries, and even “back-ups” called contingent beneficiaries. When the policyholder dies, the insurance company is legally obligated to pay out the death benefit as the policyholder had specified — assuming the circumstances of the death are not fraudulent or excluded by the policy.
Life Insurance Beneficiary Rules
If your sweet, elderly neighbor tells you that she’s named you as her life insurance beneficiary, you might wonder if that’s allowed — especially if you know she has living relatives. Can she actually have her death benefit made payable to you, even though you’re not related? The answer is yes. Policyholders have the right to name almost any beneficiary they want, including any person, any charity or foundation, or even a business.
The only real restriction in naming beneficiaries is that insurance companies cannot pay a death benefit to a minor. Some insurance companies might allow an underage beneficiary to be named, but the death benefit will not be paid to anyone younger than 18. Instead, the insurance company would turn the money over to the courts and a trust would be established for the minor beneficiary. The trust would hold the proceeds until that child turns 18.
Outside of that exception for minors, anyone can be any type of life insurance beneficiary. The types include primary revocable beneficiary, primary irrevocable beneficiary, and contingent beneficiary. Additionally, a policyholder can also specify how life insurance proceeds will be passed down to a beneficiary’s heirs; the options, as explained below, are per stirpes or per capita.
Primary revocable life insurance beneficiary
A primary beneficiary has first rights to the death benefit. A policyholder may designate more than one primary beneficiary by assigning a percentage to each. For example, say your aunt wants to list you and your sister as her beneficiaries on a $100,000 life insurance policy. If she splits the death benefit 50/50, you and your sister would each get $50,000 when your aunt passes. The split doesn’t have to be even, though. If your aunt wants to, she could allocate 30% of the benefit to you and 70% to your sister. In that case, you’d get $30,000 and your sister would receive $70,000.
Most primary beneficiaries are revocable — meaning that the policyowner does not need the beneficiary’s consent to change the policy. If you are a revocable beneficiary, the insured can change your status as primary beneficiary to contingent, remove you from the policy entirely, reduce the death benefit, or even cancel the policy. Any of these actions can be taken without your knowledge.
Primary irrevocable beneficiary
Primary beneficiaries that are irrevocable must consent to any policy changes that affect their future payout. Even after a divorce, a policyholder cannot remove an ex-spouse who has been designated as an irrevocable beneficiary — unless the ex-spouse agrees to that change. The exact rights of an irrevocable beneficiary vary by state. Some states will allow the irrevocable beneficiary to contest policy cancellation or life settlements, while others only allow the irrevocable beneficiary to challenge beneficiary status changes and changes to the death benefit.
Naming an irrevocable beneficiary limits the policyowner’s ability to manage the coverage or access living benefits. For that reason, it’s less common. Irrevocable status is mostly used by parents when designating their kids as beneficiaries.
Contingent life insurance beneficiary
Contingent beneficiaries only receive the death benefit if the primary beneficiaries cannot accept the payout. This normally happens when the primary beneficiaries have died. For example, let’s say your aunt lists her only child, your cousin, as her primary beneficiary. She also includes you and your sister as contingent beneficiaries with a 50/50 split. In that case, when your aunt dies, your cousin gets the death benefit. You and your sister would not receive anything as long as your cousin is alive. But if your aunt and your cousin both die in the same car crash, you and your sister would then split the death benefit as the contingent beneficiaries.
Per stirpes designation
A per stirpes designation is not a type of beneficiary, but it does affect who gets the death benefit. Per stirpes is a directive by the policyholder for how to distribute the proceeds to a beneficiary’s heirs. The concept is best described with an example. Say your father has a $150,000 life insurance policy that names you and your brother as 50/50 beneficiaries, per stirpes. Your brother has two kids, Rachel and Henry. If your brother dies before your father, your brother’s share of the death benefit automatically gets divided equally among his two kids. The payouts look like this:
- You get 50%, or $75,000.
- Rachel gets 25%, or $37,500, which is half of your brother’s share.
- Henry gets 25%, or $37,500, which is the other half of your brother’s share.
Per stirpes essentially keeps death benefits distributed equally across specific branches of the family.
Per capita designation
The per capita designation is a different directive for dealing with the death of a beneficiary. Let’s look at another example. Your father names you and your brother as 50/50 beneficiaries on a $150,000 life insurance policy. Your brother passes away. If your father has designated per capita, the entire death benefit is split equally among you and your brother’s two kids. The payouts now look like this:
- You get 33.3% or $50,000.
- Rachel gets 33.3% or $50,000.
- Henry gets 33.3% or $50,000.
As you can see, the per capita method results in a lower payout for you and a higher total payout to your brother’s family.
What Happens to Life Insurance with No Beneficiary?
If a parent, spouse, or even your elderly neighbor dies with a life insurance policy that has no named beneficiary, the proceeds are paid to the insured’s estate. This is problematic financially and from a timing perspective. Death benefits are not taxable when they are paid directly to the beneficiary. But as soon as that death benefit is rolled into the deceased’s estate, it becomes subject to state and federal taxes. It can also be used to pay down any debt owed by the insured. As well, the process of distributing net proceeds from the estate after debts and taxes have been paid is lengthy. As an heir of the insured, you won’t see those funds for a year or more.
For these reasons, it’s critical that insureds maintain beneficiaries on their life insurance policies. A policy without a named beneficiary just doesn’t have the advantages of a policy with one.
Your Responsibility as a Life Insurance Beneficiary
The role of life insurance beneficiary is not laden with responsibilities. You are not the executor of the estate; you are simply the recipient of that individual’s death benefit. Your only tasks at hand are to notify the insurance company and file the claim once the insured passes away. That involves gathering and submitting documentation, such as the death certificate of the insured.
Your share of the proceeds will be paid to you in a lump sum. This death benefit is not taxable income. You are also under no responsibility to use the funds to settle any debts on behalf of the insured. The money is yours, free and clear. The only exception is if you are designated as the beneficiary on a final expense insurance policy. In this case, you are supposed to use the proceeds to pay for the insured’s funeral costs. Generally, you should be aware of your role as a final expense beneficiary and have detailed instructions from the insured on his or her preferences for the burial.
Keep Communication Open with Loved Ones
If you are a beneficiary on a loved one’s policy, there are three action steps you can take today to avoid confusion and problems later.
- Ask for a copy of the policy. You’ll want to keep this in your files. That way, when the inevitable happens, you already have the policy information on hand. If the policy is final expense insurance, ask the policyowner for his or her burial preferences.
- Make sure you understand the nuances of your designation. Are you primary or contingent? Is there a per stirpes or per capita election?
- Talk through the details with the insured and other beneficiaries. Beneficiary designations can be a source of family tension, particularly when the splits are uneven. Deal with those tensions proactively. You don’t want to have family squabbles after the fact, when you are also mourning the loss of a family member.
Once the inevitable happens and you lose your loved one, there isn’t a timeline for filing the death benefit claim. But you should move forward as soon as you feel ready. The claims process can take a month or two, and your loved one would want you to have this last gift without too much delay.
- Kagan, J. (2020, April 18). Irrevocable Beneficiary: Definition. Retrieved May 06, 2020, from https://www.investopedia.com/terms/i/irrevocablebeneficiary.asp\
- Croll, M. (2020, February 05). What is a Contingent Beneficiary for a Life Insurance Policy? Retrieved May 06, 2020, from https://www.valuepenguin.com/life-insurance/contingent-beneficiary
- Dowling, R. (2017, October 03). Designating Beneficiaries Using Per Stirpes or Per Capita. Retrieved May 06, 2020, from https://www.thecommonexecutor.com/designating-beneficiaries-using-per-stirpes-or-per-capita/