A beneficiary is the intended recipient of life insurance proceeds.
If the insured person dies, the insurance company distributes the death benefit to the beneficiaries according to the owner’s instructions. Beneficiary designations are not permanent, and only the policy owner can change, remove, or add to the list, as well as choose how proceeds are divided.
Primary Beneficiary
Primary beneficiaries are the policy owner’s first choice to receive the death benefit. No limit exists on the number of primary beneficiaries that may be listed. Most people list family members as primary beneficiaries, but no rules or regulations make family members mandatory.
Contingent Beneficiary
Contingent beneficiaries are the owner’s secondary choices. The process of listing contingent beneficiaries occurs in exactly the same manner as primary beneficiaries. Insurance carriers only pay benefits to contingent beneficiaries if all primary beneficiaries have predeceased the insured person, or otherwise cannot accept proceeds.
Per Stirpes Beneficiaries
Many life insurance carriers let policy owners designate beneficiaries without actually listing them by name, but instead indicating “per stirpes” status. A per stirpes designation indicates the policy owner’s desire to have proceeds pass equally to a beneficiary’s heirs if that beneficiary dies before the insured person. In such a situation, the death benefit portion allocated to that individual gets distributed equally among his own heirs.
Misconceptions
The effect of the Last Will and Testament on life insurance policy proceeds is among the largest misconceptions about how proceeds are transferred to beneficiaries. Since a life insurance policy is a legal contract between the owner and the carrier, changes must come by way of formal legal process. A will in no way supersedes the provisions of an insurance policy, and upon the death of the insured person, the carrier is obligated to follow the most recent official instructions even if they contradict the will.
Filing a Claim
Most carriers utilize similar claims filing processes. Contact the carrier’s Claims Department, complete the necessary forms, then submit them with a certified copy of the insured person’s death certificate. Having the policy, or at least the contract number, speeds up the claims process. Some insurance companies also request medical records, which must be provided before any money gets distributed.
Taxation of Benefits
No state or federal income tax liability results from receiving life insurance policy proceeds. However, any interest earned on those proceeds is fully taxable. If you choose not to take a lump sum payout, and instead elect a series of recurring payments, you may owe income taxes on the portion of each payment deemed interest earned above the original death benefit amount.