The purpose of a life insurance policy is to financially support your beneficiary if something happens to you. Many choose to name their spouse or partner, adult children, or a charitable organization as their policy’s beneficiary. Policyholders can even name multiple beneficiaries.
There are certain instances where a beneficiary may predecease the insured or pass away before they receive your policy’s death benefit.
In the case of life insurance with no primary beneficiary, the policy would pass to the secondary (contingent) beneficiary, if one was named.
If no beneficiaries are named (or no beneficiaries survive the policyholder), the policy benefit goes to your estate to potentially be resolved in probate.
Having only one beneficiary on a life insurance policy can be risky if their death precedes yours. In this case, their death would transfer the policy payout to your estate.
Failure to replace a deceased sole beneficiary on your life insurance policy means the death benefit will transfer to your estate when you pass. An estate is distributed through a process called probate, which can take a year or more to fully resolve.
Plus, life insurance included as part of the estate may be taxed, whereas it would have provided a tax-free benefit had the payout gone directly to a beneficiary.
Since minor children can’t receive the proceeds of a life insurance policy directly, consider establishing a trust for this purpose or wait to name children as beneficiaries once they’re over the age of majority.
As with primary beneficiaries, you can also add more than one secondary beneficiary and split the death benefit between them.
If one of the primary beneficiaries dies, the policy proceeds would be split among the remaining primary beneficiaries or the deceased beneficiary’s dependents, if applicable. Otherwise, it would fall to contingent beneficiaries.
Beneficiary designations can be per stirpes or per capita. Per stirpes means “by branch” and in this beneficiary set up, children or grandchildren of a beneficiary that has passed would receive their share of the benefit.
Per capita means the beneficiary must be living to receive the death benefit and, if they pass away, their descendants get nothing.
If you have a per capita policy: If one of many primary beneficiaries dies, the policy payout will be split among the remaining beneficiaries. For example, if you have a policy split amongst your three children, and one of those children passes away before you, the death benefit from your policy would be split between the two surviving children.
If you have a per stirpes policy: In the same scenario with three children as above, the benefit for the predeceased child will pass to their children or grandchildren.
Setting up a trust can be expensive, and you’ll want to work with an attorney or CPA to understand the implications of using a trust as a life insurance beneficiary.
Some people choose to leave the benefit of a life insurance policy to a charitable organization instead of a person. It’s possible that after you decide to leave the proceeds of a life insurance policy to a charity, that charitable organization could close. In that case, the proceeds will move as they do when any sole beneficiary dies, landing the policy squarely in the probate process as part of your estate if no other beneficiaries are named.
Failure to define a new beneficiary after an organization closes means the life insurance policy proceeds go to your estate when no other beneficiaries are named. However, if you had a charitable organization as a primary beneficiary and another charity or family member as secondary, the policy would go to the contingent beneficiaries instead.
The death benefit will go to your estate when you have life insurance with no beneficiary. The process of settling an estate in probate court can take a long time, sometimes over a year. Plus, the policy proceeds, which would be untaxed if they go to a beneficiary, could end up being taxed as part of the estate.
Depending on your life insurance company, there are multiple ways you can adjust your life insurance beneficiaries. For example, you may be able to complete a change form online, over the phone, or by mail.
If you’re unsure how to update beneficiaries, contact your life insurance company for further assistance. eFinancial is available to assist you in finding the right life insurance policy and making sure your beneficiaries are appropriately set up.
