To start, let’s define the death benefit: It’s the money (lump sum or otherwise) paid to your beneficiaries if you die while your life insurance policy is in force. Whether you’re shopping for life insurance or filing a claim on a life insurance policy, there are a few things to know about beneficiaries:
- a beneficiary must be specifically designated in the life insurance policy
- there can be more than one beneficiary and, in practice, there often is
- A beneficiary does not have to be a person, it can also be an entity such as a charity, a family trust, or even a company
- you want to leave money to take care of other family members, like your parents or a sibling
- you could leave money to a family business to help ensure continued operations after you’re gone
- decides to leave money to his grandchildren (instead of his children) as part of his tax strategy
- if an accelerated death benefit was provided (see above)
- If the policyholder deliberately misrepresented their information during the application process to obtain lower premiums, the company may reduce the benefit amount accordingly or, in some cases, cancel coverage altogether
- if there were loans outstanding against the cash value (this does not normally apply to a no cash value term life policy)
- if the policy had an adjustable death benefit (which can be a feature of universal life insurance policies designed to be flexible), the payment may be less than the original coverage amount
An heir is not necessarily the same as a life insurance beneficiary
an heir is assumed, but a beneficiary is designated. this means that if a person dies intestate (that is, without a will), his heirs are the people who may have the legal right to inherit the estate of the deceased: his spouse, children, etc.1. One or more heirs are usually named as beneficiaries on a life insurance policy, but they don’t have to be. In fact, there are many reasons to name someone other than your spouse or children as beneficiaries, including:
Reading: How life insurance works after death
While anyone can be named as beneficiary, you may need your spouse’s permission
The most common reason people buy life insurance is to help protect their family’s financial well-being. That’s why married people commonly designate their spouse as the sole primary beneficiary, especially when their children are still at home. however, if you live in a state with community property laws, you must name your spouse as the sole beneficiary unless you have their consent to name someone else. one more thing: minor children usually cannot be named as beneficiaries; If you want to leave money to a minor, you may need to set up a trust to manage the financial payment until they are of legal age.
the beneficiaries can be changed
When you purchase an insurance policy, you can designate each beneficiary as revocable or irrevocable. When beneficiaries are irrevocable, it can be difficult to remove them from policies or change their share without their consent. For revocable beneficiaries, the change process is relatively easy and you don’t need permission (unless you’re your spouse and you live in a common property state). For example, with Guardian, a beneficiary change can be made online in a few minutes by going to guardianlife.com and logging in or registering for an account. Other life insurance companies may require a phone call or ask you to fill out a paper form and send it back. An annual review with your broker or financial professional can be a good time to make sure your beneficiaries are up to date.
The life insurance death benefit can be divided in any way the policyholder wants
If you’re one of the four beneficiaries, that doesn’t automatically mean you’ll get a quarter of the death benefits. the policyholder can assign different percentages to different beneficiaries.
The beneficiaries can use the money however they want
There are no stipulations or conditions on benefit payments. you can take the lump sum and use it for living expenses if you need to, but you can also use it for anything from education to retirement savings to even going on vacation.
payment may not be taxable
Generally speaking, life insurance death benefits are exempt from income tax (which is one of the most important tax benefits of life insurance). Although the benefit is generally free of income taxes, you should consult your tax advisor if you receive a death benefit payment.
sometimes part of the benefit may be paid before death
Many life insurance policies have an accelerated death benefit provision (i.e., an optional provision) that allows terminally ill policyholders to access part of the death benefit amount while they are still alive, usually to help pay for needed care2. The company may need proof of life expectancy from a medical provider to accelerate the death benefit; amounts paid will generally reduce the amount disbursed to beneficiaries after death.
Under certain circumstances, a death benefit may be reduced
While all reputable companies have a long history of paying insurance death benefits in full, there are a few situations where a death benefit can be reduced:
recipients can be charities or other 501(c)(3) organizations
As a way of creating a legacy, some policyholders may choose to designate a charity or other organization as their beneficiary. In some products, a policyholder may even choose to use certain options, such as a charitable benefits rider, which automatically provides a payment to the charity of their choice above and beyond the beneficiary’s payment.3
See also: How To Get Rid Of PMI | Rocket Mortgage