Choosing a Life Insurance Beneficiary

Posted May 6th, 2019 by Amy Danise

Choosing a beneficiary is an important part of buying life insurance. Life insurance is a contract, and a life insurer is legally obligated to pay only the person (or people) you’ve designated as the policy’s beneficiary.

What are the types of life insurance beneficiaries?

Primary beneficiary: The primary beneficiary receives the life insurance money if they’re alive when the insured person dies.

Contingent (or secondary) beneficiary: A contingent beneficiary receives the life insurance money only if the primary beneficiary is deceased when the insured person dies.

Can anyone be your life insurance beneficiary?

You can name anyone as a life insurance beneficiary -- a spouse, a child, a neighbor, even a charity. But there are some potential trouble spots to be aware of:

Naming minor children: Minors can't receive a life insurance payout directly. If a minor child is named as a beneficiary, a probate court will appoint an estate guardian for the money -- probably not what you want to happen. Instead, set up a trust to receive the money and someone who will handle the trust funds for the child until they are considered adults in your state (usually age 18).

Not naming a spouse: In community property states, naming someone who's not your spouse as a life insurance beneficiary could cause some legal issues, That's because the wages you use during a marriage to pay for the policy are also your spouse's "property." Community-property states are Alaska (optional, couples can opt in), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Naming someone with a disability and Social Security income: If a beneficiary has a disability and is receiving Social Security income (SSI) benefits, the life insurance payout could make them ineligible for further benefits. Generally one cannot have more than $2,000 in assets ($3,000 for a couple) and receive SSI. Instead, work with a lawyer to set up a special needs trust that won’t affect SSI eligibility.

How does life insurance work after someone dies?

The life insurance company will pay the death benefit to the policy’s beneficiary when the insured person has died. The beneficiary needs to submit a claim to get the payment process started, and will need a certified copy of the death certificate.

If the policy names multiple beneficiaries, they all need to make their own claims.

How do I change a life insurance beneficiary?

To change a beneficiary, the policy owner must contact the life insurance company and ask for a “change of beneficiary” form. Many insurers have the forms on their websites.

How do I find out if I’m the beneficiary of a life insurance policy?

Ideally, someone who buys a policy and names you as beneficiary will tell you. There’s no central database of life insurance policies. But if someone has died and you don’t know if you’re a beneficiary, here are tips:

  • Look for paperwork such as the policy itself or bills from a life insurance company.
  • Keep checking the person’s mail for new life insurance bills.
  • If you think you know what company they used, contact the insurer and ask if you’re the beneficiary.

Here are more tips to find a lost life insurance policy.

Do life insurance companies contact beneficiaries?

Many life insurance companies will search a government database of deaths for names of their insured customers to find out if they have died. If they find a death, the insurers will try to contact beneficiaries.

Do beneficiaries pay taxes on life insurance policies?

One of the upsides of life insurance is that the life insurance money is generally paid tax-free to beneficiaries. But there are some situations where the money could be taxed:

  • If the beneficiary also received interest from the insurer on the death benefit, the interest is usually taxable. For example, if a beneficiary waits several years to make a claim, they’ll usually receive interest on the money for that time period.
  • If the life insurance proceeds ended up going into someone’s estate, and the estate is subject to state or federal estate tax, the money could be taxed.

Can the owner of a life insurance policy be the beneficiary?

The owner of a life insurance policy can also be the beneficiary. For example, a wife might be the owner of a policy on her husband, and make herself the beneficiary. That’s because she likely has “insurable interest” in his life and would suffer financially if he died.

Only the policy owner can change the beneficiary. For example, if a wife owns a policy on her husband, he does not have control over who is named beneficiary.

Who's who on a life insurance policy

Can the insured and the beneficiary be the same person?

The insured person on a life insurance policy cannot be the beneficiary. The beneficiary is the person who is supposed to receive the money after the death of the insured person.

Can a life insurance policy be changed after death?

A life insurance company is legally obligated to pay only the beneficiary listed on a policy. If people want to dispute a beneficiary, they’ll have to go through the court system. For example, this may happen if there were a divorce and an ex-spouse was never taken off life insurance, or if someone with dementia was prodded to change a beneficiary at the last minute.

Changing heirs in a will does not affect life insurance. The life insurance contract overrides inheritances outlined in wills.

Can you take life insurance out on a parent?

You can take out life insurance on a parent, although you may have to show that you would suffer financially if the parent died. You can’t take out a policy in secret though. The parent will need to sign the application.

Find Life Insurance Today