What Is a Claimant in Life Insurance?
A claimant or beneficiary of your life insurance is the person who will receive a specific sum of money in the event of your passing. When you purchase a life insurance policy, choosing an heir is an essential step because it is the only way legally to designate who will receive the money if you pass away during the policy’s term.
If you are a beneficiary, you should understand how the policy pays out, your options, and anything that might make things more difficult. To learn more about naming or being a life insurance beneficiary, continue reading.
What Is a Beneficiary in Life Insurance?
You can designate an heir, who may be a person or an organization when you buy a life insurance policy. Also possible is having more than one. They receive a predetermined sum of money or a series of payments if they pass away during the policy’s term.
You can distribute the funds however you like as the policy owner:
- One person can be designated to receive everything.
- You can designate two or more people to split the total sum however you choose.
- Your estate may have a name.
- You can designate a trust to receive the proceeds from the policy if you have one or desire one.
- When they pass away, some people prefer to leave money for a charity; you can mention any recognized organization you like.
If necessary, you can give names to your minor children. It helps to be aware that most states require an adult guardian to oversee minor assets if you intend to do this. The process of choosing a guardian can be expensive and time-consuming.
It’s crucial to contact the insurance provider and present a death certificate if you are the beneficiary of a life insurance policy and your loved one has passed away to begin the payout procedure.
Making a trust or custodial account is one way to hasten this procedure. Your children’s money is placed in a trust, where a trustee will look after it until they are of legal age or the age you specified for them to inherit it. If you don’t determine anyone, the “de facto” beneficiary is your estate.
How Should Insurance Beneficiaries Be Known?
Make sure you give accurate information when naming people to receive insurance money. You’ll need to know things like their birthday, social security number, and contact information. Additionally, make sure everything is correct before submitting it by checking it twice. If there are mistakes, the wrong people might get the money, or your heirs might have to deal with legal issues.
Let’s take the example where you list “spouse” as your beneficiary. Two years later, you get divorced and remarry without altering your insurance policy. After your passing, both your current and former spouses might make an attempt to collect the money.
You’ve created a legal problem that could delay payout because the definition of “spouse” is ambiguous. One was your legal spouse at the time of your death, and the other was your legal spouse at the time the insurance policy was written. Along with all the legal fees, stress, and heartache that always follow fights over money, a dispute over money is likely to occur.
Contingent and Primary Beneficiaries
It is frequently advisable to add one or more supplemental beneficiaries to a policy. If the primary beneficiary (or beneficiaries) passes away or cannot be located, a contingent beneficiary is a person who gets some or all of the money.
Note: If you list multiple people, specify how much money (in a percentage form) each one should receive.
For example, suppose you buy a policy with a $1 million benefit. You designate the beneficiary as your spouse. Your partner will receive the entire sum should you pass away while the policy is still in effect. However, you might pass away before your primary beneficiary.
Your three adult children are added as contingent beneficiaries because you want to ensure that the money is passed on to your children. You include each of them in the policy and distribute the funds equally. In this manner, your children will each receive a third of the money after your passing, even if your spouse dies before you do.
Per Capita and Per Stirpes
The decision of whether to choose per capita or per stirpes when naming beneficiaries is another factor to consider. If no other contingent beneficiaries are listed on the policy, and one or more of your beneficiaries pass away, these specify how the money should be distributed.
Per capita (“per head”) is frequently used as the abbreviation. This implies that you don’t have to describe every potential event in great detail. Instead, an equal portion is distributed to each of your living beneficiaries.
For instance, if you have three adult children and one of them passes away before you do, the other two will instead receive half of the face value each. If you choose per stirpes and one of your beneficiaries passes away before you do, the beneficiary’s children, if any, will receive their share.
A per stirpes arrangement would give your two grandchildren the one-third that your three adult children would receive, for instance, if one of your three adult children passed away before you and was survived by two children. One-sixth of the funds would be given to each grandchild.
Life insurance is a wise choice for estate planning. In light of that, it might not be the best course of action for you and your situation. Consider speaking with an estate planning lawyer who can assist you in putting together a strategy to ensure that your loved ones have what they need after your passing and that your assets go to the people you want them to.
There may be a box to check on some beneficiary designation forms so you can choose per stirpes. If there isn’t a box, ask your agent if you can enter per stirpes.
Who Has the Authority to Alter the Life Insurance Beneficiary?
When submitting a life insurance application, name at least one beneficiary. It doesn’t follow that you can’t alter it later. If you are the owner, you always have the option to remove or add people. You might decide to appoint someone else because of changes in your life, for instance.
In the event of a marriage or divorce, you might want to appoint someone else. A good reason to review your policy is the birth of a child. Alternatively, you might have another justification for the change. However, if you designated a beneficiary as “irrevocable,” you will need to obtain their approval before making any changes (they must sign the policy change form).
Additionally, in some circumstances, your insurance provider or state may limit who you can name. For instance, married couples who reside in states with community property laws might need the consent of their spouse before calling anyone else.
Note: Contact your insurer and ask for a “beneficiary change form” if you want to add or change an heir.
Do beneficiaries of life insurance policies have to pay taxes? A life insurance death benefit received as a lump sum is typically not regarded as taxable income. There are, however, some circumstances in which you might owe taxes.
For instance, any interest paid above the face value of the money if it is received as monthly payments or an annuity is taxable income. Additionally, if the funds are transferred to your estate rather than a specific individual, estate taxes might apply. The good news is that there won’t be any estate taxes assessed unless your estate is worth more than $11.7 million.
Summary
- If the insured passes away during the policy term, a life insurance beneficiary receives the death benefit.
- Multiple beneficiaries, including primary and contingent beneficiaries, may be named, along with a person or trust.
- Your beneficiaries must have accurate identification information so that they can be located and legal disputes are kept to a minimum.
- Most life insurance proceeds are tax-free, but in some cases, a portion of them might be.
- Before you proceed, be sure you are aware of your state’s life insurance laws and how to handle naming minors.
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