The beneficiary of the life insurance policy is the person or organization designated to receive compensation if you die
If you have taken out life insurance and have paid your premiums (monthly installments) on time, your insurer will pay a benefit called “indemnity in case of death” if you die. The person or organization that will receive compensation in the event of death is the beneficiary of your policy.
You choose who your beneficiary is, of course, but it’s important to be aware of the legalities around who can and cannot be a beneficiary. As you will see as we tell you more about this subject.
Read on, then, about what the different types of beneficiaries are, who to name as a beneficiary on your life insurance policy, and how to ensure that he/she actually receives compensation payments in the event of death.
- Ideally, you should name someone as your life insurance beneficiary if that person(s) are financially dependent on you;
- Name a secondary beneficiary in case the primary beneficiary cannot receive compensation in the event of death;
- You can nominate more than one beneficiary, including organizations and charities;
- If necessary, update your beneficiary from time to time and ensure that the payment does not go to the wrong person or the State.
Can anyone be my life insurance beneficiary?
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You can choose a legal entity, organization or any other suitable person to be your life insurance beneficiary. The most common choices are:
- family members;
- Trusted people;
You can have more than one beneficiary and even assign a percentage of the death benefit to each of them.
It is important to name both the primary and secondary beneficiaries. The secondary beneficiary can receive compensation in the event of death if the primary beneficiary is unable to do so, as in the case of a minor who has been named the primary beneficiary of a life insurance policy.
There are some factors to consider if you plan to name a child or stepchild as your beneficiary, or if you want someone other than your spouse. Check it out.
Name a minor as a beneficiary
Although it is possible to name minors as beneficiaries, we do not recommend this practice, as if the child is still a minor when you die, there may be legal complications and, consequently, delay in receiving compensation.
If you nominate a child without a legal guardian, the fund can be blocked for many years. The legal guardian is responsible for the money until the child comes of age, which is usually by law at age 18.
Therefore, it is better to appoint a trusted adult who could have immediate access to compensation to be able to attend to the care required by the child.
What happens to life insurance without beneficiaries?
If the life insurance beneficiary dies, the money goes to his/her legal heirs. This can make the process of accessing life insurance compensation very slow, as other supporting documents are required, in addition to a whole legal process that can take some time.
Who can change the beneficiaries of a life insurance policy?
Keeping your life insurance beneficiaries up to date is one of the most important things you can do to keep your loved ones protected. The insured, who holds the life insurance policy, is the only person who can change the data regarding the identity of the beneficiaries or legal heirs of the life insurance.
Consider upgrading your policy if something happens in your life like the following events:
- Beneficiary’s death;
- Birth of a child;
You can change the beneficiary at any time. Just contact the insurer or broker. Some insurers, in fact, allow such changes to be made online, while others require at least one phone call or beneficiary change form attached to an email or correspondence you send.
During the COVID-19 pandemic, some procedures have changed and are only done by email or mail. Contact your insurer and ask them directly about these adjustments.
How are life insurance beneficiaries paid?
After your beneficiary submits their death claim, they will receive the full amount or the amount you set for them directly into their bank account.
There are a few ways to receive life insurance upon death:
- Payment in one installment: The entire amount is paid at once. Most people opt for this method because it is tax and fee-free and can cover immediate expenses such as mortgages or funeral expenses.
- Installment or annuity: the compensation is distributed monthly or annually over a period of time. This is the best option for those who do not have immediate financial issues and want to increase their death compensation income.
- Investment account: in this case, the benefit is retained in an account by the insurer and you withdraw as needed. Unused funds continue to earn over time.
You can also choose to make per capita or heir payments to your beneficiaries if one of your beneficiaries dies.
Per capita, it is a distribution in equal shares for each beneficiary, it is standardized and works for most people.
By heirs, in this case the payment of a deceased beneficiary is distributed among his heirs or descendants. This option is best if you want your coverage to pass on to your beneficiary’s family, such as a grandparent who wants the best for their grandchildren.
Can compensation in the event of death be denied to a life insurance beneficiary?
Yes, there are some scenarios where the insurer may deny you a death claim payment. Although it is unlikely to happen, a policy may end up not being paid out for the following reasons:
- If the customer omits important information during the life insurance application;
- If the customer commits suicide during the first two years of the policy;
- If the client is murdered by the beneficiary in order to receive compensation.
Especially during the first two years of the policy term, called the “dispute period”, the insurer or broker may review the initial application if they suspect fraud or omission to reduce the premium amount. If the customer is found to have been dishonest or intentionally omitted, the insurer may deny payment or reduce the final amount of the death benefit due to unpaid premiums.
If the insurer disputes the death claim and denies coverage payment, it will usually return the previously paid premium amount. That’s why it’s important to be very sincere and secure when filling out the health questionnaire.
Now, you might be wondering how to tell if someone who passed away left life insurance. In this case, the market is very diverse and, between us, it is not uncommon to find insurance companies that turn a blind eye to the non-payment of premiums, which may be a sign that the insured person has died.
Is the money received by beneficiaries tax-free?
The money received from a life insurance payment is not considered taxable as it is an indemnity fund, it must be declared during the IR in the exempt and non-taxable field.
There are some situations in which the beneficiary will need to pay cash fees in connection with the life insurance payment:
- Compensation paid as an annuity: when the beneficiary chooses to receive payments in installments, the fund not yet paid becomes profitable. This income is subject to fees.
Therefore, we recommend that you seek an accountant to assist you during your declaration and compliance check.
Your life insurance beneficiaries are the main reason you take out cover, which makes all the details described above very important to ensure they receive compensation if you die.
Update your policy details regularly, consult an expert or financial adviser on the best way to arrange compensation. You can protect your family’s financial security once and for all.