What Is an Insurance Beneficiary & How Do You Name One?
Understand insurance beneficiaries and how to effectively name and manage them. Ensure your policy benefits always reach your intended recipients.
An insurance beneficiary is the individual or entity designated to receive the financial payout from an insurance policy, such as a life insurance death benefit, upon a specified event. This designation ensures that the policy’s proceeds are distributed according to the policyholder’s wishes, bypassing the probate process that typically applies to assets distributed through a will. Naming a beneficiary helps facilitate the smooth and timely transfer of funds.
Types of Beneficiaries
Beneficiaries can be categorized based on their priority and how easily their designation can be changed. A primary beneficiary is the first in line to receive the insurance proceeds. If there are multiple primary beneficiaries, the policyholder specifies the percentage of the benefit each will receive.
A contingent, or secondary, beneficiary is designated to receive the proceeds if the primary beneficiary is unable or unwilling to do so, for instance, if they predecease the policyholder. Naming a contingent beneficiary prevents the proceeds from potentially going to the policyholder’s estate, which could lead to probate and delays.
Beneficiary designations can also be revocable or irrevocable. A revocable beneficiary designation allows the policyholder to change the named beneficiary at any time without their consent. An irrevocable beneficiary designation cannot be changed without the written consent of that beneficiary, granting them certain rights and a vested interest in the policy. Common choices for beneficiaries include individuals, trusts, charities, or an estate.
Process for Naming and Changing Beneficiaries
Designating or changing a beneficiary involves a clear procedural path to ensure accuracy and legal validity. Policyholders need to gather specific information for each intended beneficiary, including their full legal name, relationship to the insured, date of birth, current address, and Social Security Number. Providing comprehensive details assists the insurance company in identifying and locating beneficiaries, which can expedite the payout process.
The next step involves obtaining the correct beneficiary designation form from the insurance company. These forms are typically available by contacting the insurer directly, accessing their official website, or working with an insurance agent. The forms require careful completion, with an emphasis on legibility and precise entry of all requested informational fields.
After filling out the form, it must be submitted to the insurance company. Ensure that the designated percentages for all beneficiaries add up to 100% to avoid ambiguity in distribution. The process for changing a beneficiary is generally similar to the initial designation, requiring a new form to supersede any prior instructions.
Key Considerations for Beneficiary Designations
Maintaining accurate and current beneficiary designations is important for ensuring that insurance proceeds are distributed as intended. Using full legal names and verifying all personal details helps prevent delays or potential disputes during the claims process.
Regularly reviewing and updating beneficiary designations is necessary, particularly after significant life events such as marriage, divorce, the birth of a child, or the death of a named beneficiary. Outdated designations can lead to unintended recipients receiving funds, or the proceeds being directed to the policyholder’s estate, potentially subjecting them to probate. Naming contingent beneficiaries is a practical step to ensure a smooth transfer of funds if the primary beneficiary cannot receive them.
When designating multiple beneficiaries, policyholders may encounter terms like per stirpes or per capita, which dictate how proceeds are distributed if a beneficiary predeceases the insured. A per stirpes designation means that if a named beneficiary dies, their share passes to their descendants. A per capita designation means that the proceeds are divided equally among the surviving named beneficiaries.
Life insurance proceeds are generally not considered taxable income to the beneficiary. However, interest earned on proceeds that are paid out in installments rather than a lump sum may be subject to income tax. Aligning beneficiary designations with an overall estate plan helps ensure that all assets are managed cohesively.