Ready to buy life insurance? A very important part of the life insurance buying process is designating your beneficiaries. A beneficiary is a person who will receive the life insurance payout when the insured individual dies. This post will answer some of the most common questions regarding life insurance policy beneficiaries.
What information about my beneficiary will I need for the application?
When completing the beneficiary designation form, you’ll typically need the following information about your beneficiary:
- Full legal name
- Birth date
- Relationship to you
- Taxpayer ID number or SSN
Not all life insurance companies require the same information. Your Quotacy agent may reach out to you if the insurance company needs any further information about a beneficiary.
What if I want to name more than one beneficiary?
You can name more than one primary beneficiary. You can also name contingent and tertiary beneficiaries.
If there are multiple primary beneficiaries, each must be identified and a specific percentage payable to each should also be defined. The percentages need to add up to 100.
If one of the primary beneficiaries dies before you, the surviving beneficiaries will share the deceased’s percentage unless you state otherwise. You can opt to designate that the proceeds are divided per stirpes or per capita.
Per stirpes means that if a beneficiary dies, that beneficiary’s heirs then receive their share.
Per capita means that if a beneficiary dies, the proceeds are split evenly between the surviving beneficiaries and the deceased beneficiary’s heirs.
Naming contingent beneficiaries is a good idea. Tertiary isn’t as common, but still good practice. A contingent beneficiary receives the death benefit payout if the primary beneficiaries are unable to receive it. A tertiary beneficiary would receive the payout if both primary and contingent beneficiaries are unable to. Without naming backup beneficiaries, if the primary beneficiary dies before you or is otherwise unable to accept the payout then your death benefit would revert into your estate. This is typically not ideal.
What happens if my estate is my policy beneficiary?
It’s best if your life insurance beneficiary is not part of your estate because of the following reasons:
- The proceeds are included in your taxable estate. Depending on the state you live, this means it may be subject to estate and/or inheritance taxes.
- The proceeds go through the probate process. All property in an estate goes through probate. This is the official court process of validating a will and distributing estate assets to the appropriate beneficiaries. The probate process can increase estate administration costs and delays in distributing the proceeds. Probate files are also public court record which removes the privacy once afforded to the life insurance policy.
- Creditors have access to the policy proceeds. Normally life insurance proceeds are exempt from creditors’ claims but not if it’s part of your estate.
Can I name my minor child the beneficiary?
Your minor child can be the beneficiary of a life insurance policy, but if the child is still a minor when you die then a guardian will need to be appointed to receive the death benefit and manage it on behalf of your child. Once your child reaches the legal age of majority according to your state (either 18 or 21) then he or she will take control of the funds.
The court process to appoint a guardian can be expensive, time-consuming, and inconvenient. Instead of naming your minor child the beneficiary, consider naming a trusted adult, use a trust, or use a Uniform Transfers to Minors Act custodianship.
Can I name someone with special needs as my beneficiary?
If you have a lifelong dependent, such as a child with special needs, it would be unwise to list that individual as a beneficiary. Anyone who receives a gift or inheritance of more than $2,000 is disqualified for government benefits such as Supplement Security Income (SSI) and Medicaid. Instead, set up a special needs trust and name the trust as the beneficiary. A trustee you choose can manage the funds and there would be no need for a court to designate a guardian.
Am I able to change the beneficiary?
If you are the policyowner you can change the beneficiary to anyone at any time. The only exception is if the current beneficiary on the policy is irrevocable. If the beneficiary is irrevocable, you cannot make changes to the policy without his or her consent. A common situation of a beneficiary being designated as irrevocable is in the case of divorce agreements.
How often should I review my beneficiary designations?
Life insurance is not set-it and forget-it. Marriage, divorce, deaths, new babies, and other major life events may bring the need to change your policy beneficiaries and could even mean you need a new life insurance policy altogether. Review your life insurance policy every few years and after any big life events.
Without naming backup beneficiaries, if the primary beneficiary dies before you or is otherwise unable to accept the payout then your death benefit would revert into your estate. This is typically not ideal.
If I get divorced, does this automatically change my beneficiary?
Some states in the U.S. have laws that immediately terminate an ex-spouse’s beneficiary rights and some don’t. To avoid the drama and court hassle for your loved ones, we advise that you just assume your state does not and update the life insurance beneficiaries as necessary. It’s all too common of an occurrence for someone to divorce and remarry and the policy remains unchanged and the death benefit ends up going to an ex-spouse with the new spouse receiving nothing.
Also keep in mind you cannot change the beneficiaries of a life insurance policy in a will. The terms of a life insurance contract trump the terms in a will. If you remarry and in your will state that you want your assets to go to your current spouse, this does not mean your life insurance death benefit now goes to your current spouse. If your ex-spouse is still listed as the life insurance beneficiary, the death benefit will go to your ex-spouse.
When should I use a trust as a beneficiary?
In general, there are two different kinds of trusts: revocable and irrevocable. A revocable trust means that the creator (grantor) has control over the assets in the trust until death. An irrevocable trust means that the creator no longer has ownership rights to the assets placed in the trust and cannot make any changes to the trust. Because the assets are no longer accessible by the creator they will be excluded from the creator’s estate at death and therefore not subject to estate taxes and free from the reach of creditors.
There are many cases in which naming a trust the beneficiary of a life insurance policy instead of an individual is advisable:
- If the individual is a minor
- If the individual has special needs
- If the individual has alcohol, drug, or gambling problems
- If the individual can’t be trusted with large sums of money
When naming a trust the beneficiary of a life insurance policy, you can set many terms. For example, you specify exactly when and how much your loved ones are to receive. You name a trustee to manage these funds on behalf of the trust beneficiary (your loved ones).
Can I name a charity as a beneficiary?
Yes. In fact, a charity is a great option to name as a contingent beneficiary if there are no individuals you’d like to receive the death benefit if your primary beneficiary can’t.
You can also donate a life insurance policy to a charity which can be a great estate planning strategy for those with high net worth. When gifting a policy, the charitable organization would be the owner and beneficiary, and you the insured, with you continuing to pay the premiums.
Gifting a life insurance policy can greatly reduce the donor’s taxable estate, which can save thousands of dollars in estate taxes. Donors can also deduct the policy’s fair market value when filing taxes, which can be quite significant in some cases.
Can my beneficiary be a non-U.S. citizen?
Yes, your life insurance policy’s beneficiary can be a non-U.S. citizen. However, in these situations you and/or your beneficiary may not be eligible for all tax benefits. For example, normally spouses have no limits on how much money they can transfer to one another without incurring taxes under marital deduction laws. If your spouse is not a U.S. citizen, however, then these laws don’t apply. So, if your life insurance beneficiary is your non-U.S. citizen spouse then you will have estate taxes on any amount above the federal exemption level.
Can the policy owner, insured, and beneficiary all be different people?
Yes, but because of the potential tax consequences we don’t recommend it. When the owner, insured, and beneficiary are three different people this is referred to as the Goodman Triangle. Upon the death of the insured, the owner will be gifting the death benefit to the beneficiary, in the eyes of the IRS. Any amount above the federal gift tax exemption will be taxed. As of 2019, the annual exclusion amount is $15,000. There are also a few states that impose a gift tax. If applicable, this would be in addition to the federal gift tax.
For more information about designating beneficiaries, check out our blog here: How to Designate Beneficiaries on Your Life Insurance Policy. If you have any other questions, feel free to leave it in the comments or contact your Quotacy agent directly.
About the writer