A life insurance contract has a section where you can list a person, estate, trust, or institution as an entity that will receive the death benefits after the insured dies. This is known as a beneficiary and here we will discuss the life insurance beneficiary rules as well as other good-to-know information.
Life insurance rules
Insurable interest must exist if you are purchasing life insurance from another person at the time of application. Insurable interest means that there would be a financial loss if the object(or person) were damaged or lost. For life insurance, this usually means that you have an insurable interest in those you are closely related to and those you have a financial relationship with.
If you have a business and are taking on a new partner then you each have an interest in each other as the death of any single person will have a financial impact on the business. The same is true if you are married and your spouse or kids pass away.
Insurable interest does not need to exist if the life insurance policy is yours and you are picking a beneficiary. You are considered to have an insurable interest in yourself however the beneficiary that you select may not even know you.
Life insurance beneficiary rules
So insurable interest applies to those purchasing life insurance. To clarify there must be an insurable interest between the policyholder(person/entity paying for the policy) and the insured but none need exist between insured and beneficiary.
The rules of picking a beneficiary are up to the policy owner though other laws may affect the ability to distribute the death benefit to them. If you bought a life insurance policy on yourself you could pick anyone or any entity as a beneficiary for any reason or none at all. Here are some situations that may cause issues with your life insurance.
Learn how to get a whole life insurance policy from this article to better understand the process.
- not specifying specific conditions for certain beneficiaries
This applies when naming multiple beneficiaries at the same time without specifying the split between them. Remember that a life insurance company has to distribute the proceeds in full. So they need to know how you want 100% of the face amount to be distributed.
- Not naming enough beneficiaries
If you want money from your policy to go to a charity, company, person, or persons and you don’t name them then most likely they will not get anything. Someone telling you “don’t worry I’ll give them some if something happens” is not a legal contract. What they say now may be totally different from what they say after you pass away.
However, if you want your life insurance death benefit to be distributed make sure you put all the beneficiaries needed to do so. If you need further clarification then have a last will and testament written to help. If you have significant amounts of life insurance, then it may be simpler to list all the proceeds to a trust and have a well-written with a guardian or attorney selected to help distribute things appropriately.
- Listing a child as a beneficiary
Life insurance companies will only make a payment to an individual that is at least 18 (or 21 depending on the state) years old. If you buy life insurance specifically to help protect a minor then you’ll need to get a trust created with proper legal arrangements to have a guardian manage the funds until they are legally old enough to take over.
What rights does a beneficiary have?
Other than being the recipient of death benefits after someone passes away, the only right they have is to be notified they are the beneficiary when the insured individual passes away.
Does the death benefit go to the spouse or a beneficiary?
If you live in a state that has a community property law that defines all your assets as being equally owned then your life insurance death benefit would go to your spouse regardless if you designate them as your beneficiary or not. For most people and most states, this is not the case, however. Aside from that, people move on a regular basis so in the event you do, it’s simply best to have beneficiaries listed so you don’t need to worry about who it will go to.
How to divide multiple beneficiaries
The quick answer is however the percentages are listed on the beneficiaries page of the life insurance contract. If it’s done equally, then one of them will have to receive 34% because the value has to add up to 100%.
Does the beneficiary get all life insurance money?
Maybe. Proceeds for a life insurance policy are distributed according to the beneficiaries listed. If only one is then that person gets it all. If the person listed dies and no others are listed then it goes to the insured’s estate and through probate, which then will distribute it to any heirs.
If multiple beneficiaries are listed then it is paid out on a percentage basis that equals 100%. So, if five people are listed it could be 20% each, or it could be 50% to one, 10% to 3 others, and 20% to the fifth person, so long as it adds up to 100%.
Revocable and irrevocable beneficiaries
Most beneficiaries listed are what’s called revocable beneficiaries. You can update, change, add or remove them at any time.
An irrevocable beneficiary however cannot be changed. They are rather uncommon though if you have someone you want to ensure the benefit goes to then you could consider listing them that way.
If you want to remove an irrevocable beneficiary you have to get their permission to do so. This usually requires you to get lawyers involved in the process. A revocable beneficiary can be removed simply by filling out a form and sending it to the insurance company, not so with an irrevocable beneficiary.
Commonly listed as irrevocable beneficiaries are children, though sometimes spouses are listed as such yet in the event of divorce, this means they cannot be removed without their consent. This can cause significant contention when trying to alter your policy, for example trying to cancel the policy so they don’t get the death benefit may still require their permission.
Community property law states at the time of writing:
From what I could find at the time of writing this in 2022 the community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. There are other states where community property law is optional at the time of marriage. If you aren’t sure just check with your state website.
Listing beneficiaries
LIsting beneficiaries is fairly straightforward within a life insurance application. It will ask if/whom you want to list and then ask for some identifying information.
COmmonly what’s asked for is the relationship to you, full name, address, and then possibly date of birth, social security number, and phone number.
The more exact and accurate you are with this information the faster a death claim will be able to distribute the funds to them.
This brings us lastly to: make sure they know how to file a claim.
An insurance company will do their best to locate a beneficiary as well as distribute a death benefit however they need to be notified that a death occurred in order to start that process. So if they aren’t notified by the authorities because someone passed away in really strange circumstances then it could delay the death proceeds.
Having a copy of your life insurance policy, or giving your beneficiaries a copy may help them in the event something happens. They can take that and speak to the insurance company and then get the necessary paperwork and documents that the company asks for to submit and file the claim as soon as possible.
If you are looking for an agent dedicated to helping you find the most appropriate life insurance option for you and your circumstances contact us today.
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