When it comes to life insurance, designating a beneficiary can be complex. Beneficiary designations are instructions for the handling of a specific asset, while wills and other estate planning processes address the entirety of an individual’s assets. Beneficiary designations bypass probate for immediate transfer; for this reason, it is important to be sure about one’s decision.
Considerations When Choosing Beneficiaries
Each individual’s decision when choosing a life insurance beneficiary will look different because no one’s circumstances are the same. One may have a spouse or partner, children, aging parents, a blended family, or any other relationships. While not the case for all life insurance policies, many firms, like Everyday Life Insurance, offer plans that allow naming multiple beneficiaries.
In general, a life insurance policy should name the individual or individuals who rely most on their income as beneficiaries. This may look like naming a spouse or partner as one’s primary beneficiary, and naming any children as contingent beneficiaries. This ensures that those who depended on an individual before their death will have the monetary support they need.
When to Update Life Insurance Beneficiaries
A list of life insurance beneficiaries should not be stagnant. Life events such as marriage or divorce, childbirth, a new mortgage, the death of a beneficiary, or business changes may prompt a change in one’s plans. Any number of major milestones or losses could cause a life insurance payout to go to the wrong person, or not be distributed as fairly as an individual may have intended.
Additionally, the terminology used when identifying beneficiaries could complicate or delay a life insurance payout. Outdated designations, missing contingent beneficiaries, unclear naming (e.g., nicknames), and failing to coordinate with account ownership when relevant could each impact payouts. If one is unsure about their wording, it may be worth consulting an expert.
It may also be beneficial to notify the beneficiaries.
Life Insurance Beneficiaries and Taxes
Generally, life insurance proceeds paid to a beneficiary are not taxable. While it is typically excluded from federal income tax, regardless of policy type, interests earned on proceeds or payments from an estate may be taxed. Taxability likely varies from state to state and from one policy to another, making it important to consider how one’s life insurance plans may be affected by taxes.
Finding the Right Policy for One’s Needs
Choosing a life insurance policy may feel complex, but that is all the more reason to consider one’s decision carefully. A policy determines how many beneficiaries may be named, how they receive their payments, and whether the payments are taxed.
Regular updates to one’s plans amid major life changes are also important to maintain, ensuring that a life insurance payout is distributed with clear intent.
FAQ
Q: Can multiple people be named as life insurance beneficiaries?
A: Yes, many policies allow multiple beneficiaries. These plans allow an individual to assign percentages or specific amounts, helping to align with actual responsibilities. When choosing a life insurance policy, consider whether it allows multiple beneficiaries.
Q: What’s the difference between primary and contingent beneficiaries?
A: A primary beneficiary or beneficiaries are first in line to receive a life insurance payout, while a contingent beneficiary may receive those benefits if the primary beneficiary cannot.
Q: When should life insurance beneficiaries be updated?
A: It is commonly recommended to review beneficiaries after major life events, such as marriage or divorce, since older designations may no longer match an individual’s intentions.
Q: Are life insurance beneficiaries taxed on payout?
A: Proceeds are generally not treated as taxable income for beneficiaries, but interest gained, as well as certain unique situations, may be taxable depending on what those circumstances may look like.
Written in partnership with Tom White
