The primary beneficiary of your life insurance policy is the person, charitable organization, trust, estate, or business who receives the payout when you die.
Who can I name as a primary beneficiary?
Life insurance is that different form of insurance where the person who signs the policy and makes the payments is not the one who receives the checks after filing a claim. (Because, let’s face it, if a claim is filed—you’re not around anymore.) If you’ve decided to apply for life insurance, it’s in order to support your surviving loved ones, or send money to an organization or business when you pass on.
So who can be your beneficiary? It depends on your insurer. With the term life insurance offering from Lemonade, you could pick your your spouse (or ex-spouse), domestic partner, parents, kids, business partner, fiance or fiancee, sibling, or grandparent. Whoever you choose has to have what’s called ‘insurable interest,’ though, in that they’d have some “financial loss or hardship” if you were to pass. This is who would receive the payout (called, and we realize this is a downer, a ‘death benefit’).
But, depending on your circumstances, you might use your life insurance policy to provide financial support for other loved ones, like a sibling or even an elderly parent who would need ongoing care should that person outlive you. Others use life insurance as a way to transfer wealth to their children tax-free, since life insurance payouts are (with some exceptions) not reported to the IRS as taxable income.
One thing to keep in mind, if you’re naming your kids as your beneficiaries: If they’re still minors at the time of your death, you’ll need to have made some special provisions in order for them to receive the death benefit. For instance, you’ll need to appoint a legal guardian or a trust to administer the funds until they reach the age of majority, which might be 18 or 21, depending on where they live.
If there is a charitable organization you admire, life insurance can be a way to bestow a generous gift on a non-profit you’re passionate about.
Can I split the death benefit among more than one beneficiary?
Yes indeed! You have a great deal of flexibility in terms of how you assign the death benefit. If you’re splitting up the money between your spouse and your two children, for example, you might want to leave fifty percent to your spouse and twenty-five percent to each of the little ones. Or you could leave seventy-five percent to your spouse and twenty-five percent to a charitable organization, like the ACLU, or your faith institution of choice.
All the designations, of course, have to be made in writing in the policy itself. Even if you discuss with your spouse that, say, he and each of your children should receive equal portions of the payout, if your spouse is the only person designated as a beneficiary, your spouse gets the funds. Similarly, say you and your business partner sign an informal contract saying that the death benefit will go to her and your employees… but the policy itself says that your partner herself is the sole beneficiary. When the time comes, if she greedily decides to keep the benefit, the insurance company isn’t bound to distribute it according to the terms of the contract, but rather according to the policy terms.
What info will I need to designate a beneficiary?
Be sure to list all the identifying information for each beneficiary. Insurers need info like full name, address, and date of birth. “That guy Jimmy from the bar” won’t cut it.
What if at some point I decide I want to change who is my beneficiary?
No sweat. You can typically change your beneficiaries without much hassle, which is good, because you may wish to revise the primary beneficiary or the allotment of funds if you or they experience major life events. Any time you need to make a change, just reach out to Lemonade, and we’ll send documents (digitally, of course) for you and the beneficiary to sign. We’ll process the change pronto.
If you divorce and remarry, for example, or if your children win the lottery (congrats!) or otherwise outgrow their dependence on you, you can easily reassign the death benefit to your new spouse or to another family member. Remember, too, that if you’ve assigned a charitable organization or company as your beneficiary, you’ll want to find another lucky recipient if they should go out of operation. To cover all your bases, you can also assign a fallback recipient, or what we call a contingent beneficiary — see below.
What happens if my primary beneficiary has died, or gone out of business?
Good question. To plan for this, you can designate a fallback recipient for the payout, known as a contingent beneficiary. (Learn more about contingent beneficiaries here.) This person would be next in line to receive the funds. If you want to be extra careful, you can also name a second fallback, or, in insurance lingo, a tertiary beneficiary.
What happens if I don’t name a beneficiary, or my primary beneficiary and contingent beneficiaries have died?
In this case, the payout goes to your estate, which can be subject to a lengthy probate court procedure, aka, a judge decides who gets the dough.
I’ve also heard of irrevocable and revocable beneficiaries, and collateral assignment beneficiaries. What’s that all about?
If you really want extra credit, you can add this to your homework.
In most cases, you would make your beneficiaries revocable, or changeable, so that you can swap beneficiaries in case of significant changes to your life circumstances, or theirs.
An irrevocable beneficiary cannot be changed without their consent. You can designate a beneficiary as irrevocable if you and the beneficiary agree on it and sign the papers accordingly. Some couples make irrevocable life insurance payouts part of their pre-nuptial agreements. In some divorce cases, the courts may compel one spouse to designate an ex-spouse as an irrevocable beneficiary in order to secure child support.
What about collateral assignment? If you take out a loan, you can designate the lender as the beneficiary, so that the life insurance policy acts as collateral. Should you die without having paid the loan back, the payout goes to the lender.
Can a beneficiary ever be ineligible for the death benefit?
Yes, there are a couple of circumstances where a beneficiary cannot receive the payout.
First, if the beneficiary takes your life in order to get the death benefit, they can’t collect, under what is known as “the slayer rule.” Nothing to do with the heavy metal band Slayer, or the fact that Slayer, inarguably, rules. So if someone wants to take out a million dollar policy on you, be sure you trust them! In any case, you have to sign the papers, so at least they can’t do it without your knowledge. (We’re not trying to make light of anything here, but when it comes to life insurance, it helps to have a healthy sense of humor.)
Second, if the policyholder commits suicide within two years of taking out the policy, insurers will not pay the benefit, though some insurers do refund the premiums.
If you, or someone you know, is at risk, the National Suicide Prevention Lifeline is available around the clock. Just dial 1-800-273-TALK (8255) or reach them online, for free, confidential support.