What is a life insurance beneficiary?
A life insurance beneficiary is the entity that will receive the death benefit upon the insured's passing. Learn what to consider when choosing a beneficiary.
Information courtesy of USAA Life Insurance Company and USAA Life Insurance Company of New York
Video Transcript: What's a life insurance beneficiary?
Video Duration: 02 minutes 00 seconds
Who are your beneficiaries? Elapsed Time 00 Minutes 00 Seconds [00:00]
You purchased life insurance to protect your loved ones in the event of your death. That's who your beneficiaries are, the people you're trying to protect.
Naming your beneficiary is an important part of owning a policy. After all, this is your chance to choose who receives the benefit when you're no longer around.
What happens if you don't name a beneficiary? Elapsed Time 00 Minutes 18 Seconds [00:18]
But what would happen if you forgot to name someone as your beneficiary?
Well, the death benefit might go to the wrong person. In some cases, the payouts would go to your estate, which could complicate things.
Who can be a beneficiary? Elapsed Time 00 Minutes 31 Seconds [00:31]
Who can be a beneficiary?
Selecting your beneficiary is easy. You can name a person such as your spouse or family member. You can also choose a trust, an estate or a charity.
Some insurers limit how many beneficiaries you can list. Be sure to read the contract when signing a life insurance policy.
You can also name two types of beneficiaries.
Your primary beneficiary will be the first to receive your policy's death benefit. You can name several primary beneficiaries and split the benefit amongst them.
For example, if you decide two of your adult children should receive the money, you can then decide how much each one gets.
You can also name a contingent beneficiary who'll receive the money if your primary beneficiary dies before you do.
Can I change beneficiaries? Elapsed Time 01 Minutes 20 Seconds [01:20]
Can I change the beneficiary on my life insurance policy?
Most policies allow you to change the beneficiary at any time. Many people do so after a major life event, like the death of a loved one, the birth of a child, or a divorce.
Do beneficiaries pay taxes? Elapsed Time 01 Minutes 36 Seconds [01:36]
Do beneficiaries pay taxes on the money they receive?
For the most part, death benefits aren't considered taxable income. But in some cases, your beneficiary may have to pay an estate or inheritance tax.
To learn more, it's best to talk to your tax advisor.
To learn more about life insurance, visit usaa.com/life.
Description of visual information: [To learn more about life insurance, visit usaa.com/life.
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.
Life insurance and annuities provided by USAA Life Insurance Company, San Antonio, TX and in New York by USAA Life Insurance Company of New York, Highland Falls, NY. All insurance products are subject to state availability, issue limitations and contractual terms and conditions. Each company has sole financial responsibility for its own products.] End of description.
End Elapsed Time 02 Minutes, 00 Seconds [02:00]
Selecting your life insurance beneficiary is an important part of owning a policy. After all, you're determining how the benefit gets paid in the event of your death.
As life happens, many people forget to update their policy information, which is understandable. Let's say you're going through a big event, such as the birth of a child, a divorce or a new marriage, your life insurance is probably the last thing on your mind. But unless you remember to change your beneficiary, the death benefit might go to someone you don't intend.
Determining who receives the payout may not be as easy as listing your spouse, children or preferred charity. Read on for a roundup on life insurance beneficiaries, insurance payouts and rules to consider.
Who can be a beneficiary?
You can name almost any person or organization as your life insurance beneficiary. Common examples include:
- A family member or your spouse.
- Multiple people, like your children.
- A trust.
- Your estate.
- A charitable organization.
Some insurers limit how many beneficiaries you can list. To ensure your policy will have the intended effect, be sure to read the contract when signing a life insurance policy.
It's also important to note that there must be “insurable interest” at the time the life insurance contract is set up. In other words, a stranger cannot buy a policy on your life, and name themselves as the beneficiary.
What does it mean to be a primary beneficiary?
The primary beneficiary of your life insurance policy is the first in line to receive your policy's death benefit.
If you find it difficult to choose, remember that you can name several primary beneficiaries.
In the case of more than one, the payout splits according to your wishes. For example, if you name two adult children as your primary beneficiaries, your benefit splits between them. You can choose a percentage you want each to receive — say, 60% to one child and 40% to the other.
What is a contingent beneficiary?
Naming a contingent life insurance beneficiary, also known as a secondary beneficiary, is like having a backup plan. This person or entity will receive your policy's payout if your primary beneficiary is not eligible.
For example, if your primary beneficiary has died and you haven't updated your policy, the death benefit will go to your secondary beneficiary.
What happens if there is no beneficiary?
Most life insurance policies have you name at least one beneficiary. Yet, it's not uncommon for policyholders to forget to list a recipient.
If there's no beneficiary, the policy payout will go to your estate, making it a part of your assets. That may sound fine, but it can come with tax complications.
Then the payout usually becomes part of the estate's probate process, which is often long and tedious. If you have a life insurance policy, chances are, you got it to protect your loved ones. You'll want them to have that money right away instead of waiting for it to clear probate.
Can I change the beneficiary on my life insurance policy?
Most policies allow you to change the beneficiary at any time. Many people do so after a major life event, like the death of a loved one, the birth of a child or a divorce.
In some circumstances, your beneficiary designation is irrevocable. In these situations, you can't change the beneficiary without the permission of the current beneficiary. This is common with terms of a trust, divorce decrees or business-owned policies.
It's important to note that the only person who can change the beneficiary is the policy owner. The process is usually an easy one: Fill out a form, make a phone call or go online to your insurance company's portal.
Do beneficiaries pay taxes on the money they receive?
In most cases, death benefits are not considered taxable income for beneficiaries.
But certain factors might make the payout subject to estate or inheritance tax. Consult your tax advisor if this is a potential concern for you or your heirs.
Are there any special rules for beneficiaries?
Besides the beneficiary rules in a legal agreement, there are also community property laws that regulate payouts.
For example, let's say the policyholder dies with her adult child as the primary beneficiary. If the policyholder was married and lived in a community property state, her surviving spouse may have a right to up to 50% of the policy payout, even if he wasn't named as the beneficiary.
This can get tricky, so seek the help of a legal professional for complex situations.
You should also be cautious about naming a minor child as a beneficiary. If the child has not reached age of majority (designated in their state of residence) then the insurance company may not payout the benefit until they come of age, or until a guardian of the minor's estate is appointed.
Whether you're still planning your estate or currently experiencing a loss, let us help guide you with our survivorship resources.