1. What is a beneficiary?

In the broadest sense, a beneficiary is someone who, whether naturally or legally, will receive either money or other benefits from a benefactor. Or simply put, a beneficiary is the person who receives anything that you’re going to leave behind. In life insurance terms, a life insurance beneficiary is the person who receives the death benefit, or payout, of your policy.

Pretty simple, yeah? Considering the purpose of a life insurance policy is to leave a lump sum of money to someone, you’re probably aware of the importance of a beneficiary. A life insurance beneficiary can be a person, such as a spouse or a child or whomever you choose. Policyholders can also name charities, trusts, and even businesses as beneficiaries on their life insurance policies. 

Another thing of note is that you’re not limited to selecting only one beneficiary. As a policyholder, you can name your spouse and a charity as beneficiaries on your term life insurance policy and designate who gets what percentage. Depending on your needs and interests, your beneficiaries have a decent amount of flexibility in determining where your death benefit payout will go.

2. How can beneficiaries use a death benefit?

There are not any  life insurance beneficiary rules for your loved ones to follow. So once you pass away and the money goes to the beneficiary, they’re free to use it as they want. The smart policyholder will work with their beneficiary to ensure that the money will go to the agreed upon areas of interest.

For example, if you and your spouse want a policy to cover your kids’ education, then having continued discussions on the right coverage amount, suspected educational costs, additional costs, etc., is going to help ensure the money is used in the desired way. Again, beneficiaries can use the money any way they want, once it’s turned over. 

3. Are death benefits taxable?

Death benefits aren’t generally included in gross income, meaning beneficiaries typically don’t have to pay taxes on the payout. You may have to report any kind of interest received. This is one of the main reasons why term life insurance can be seen as a means of passing along generational wealth, since the money being passed on isn’t taxed.

4. How to choose a life insurance beneficiary

This may feel obvious, but whenever money is involved, things stop being quite as simple. The best way to think about choosing a beneficiary, as a term life insurance policyholder, is to think about the people who financially depend on you. We immediately think of our partners or kids, but there can be others in our circles who rely on our financial contributions.

A great place to start is thinking about a spouse or partner. If you live together, having term life coverage to take care of housing costs is something to think about. Whether that’s covering the mortgage costs or taking care of the rent, having your living situation settled in the face of a tragedy can be a huge help. This also applies if you’re single. For those who have roommates, you might think about including them as a beneficiary, so they can continue to live in the place of residence and take care of your side of the rent.

Spouses also make sense in community property states, where spouses automatically receive the debts of their deceased partners that were accrued while married. That debt can include things like credit card debt and auto loans. Your spouse wouldn’t need to be a cosigner on any of those either in a community property state. A term life insurance coverage could help tackle those before they become even bigger problems.

Speaking of debts, your parents may be important life insurance beneficiary candidates. If they were co-signers on any private student loans you may have, those debts will roll back to them in the event of your death. Setting aside some money to tackle that kind of debt could go a long way to protecting not just your spouse, or kids, but your parents as well.

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5. Life insurance beneficiary—spouse or child?

Example time—you’ve got a spouse and a child and you’re wondering, between the two of them, who you should choose as a beneficiary. Maybe you’re divorced and you want the money to go directly to your kid. However, children are more complicated as far as beneficiaries go. Minor children cannot directly receive the proceeds of a life insurance policy. If you try it, your state of residence may appoint a guardian, who would then determine the course of action with the funds. 

Non-minor kids, however, would work as beneficiaries on a term life policy. But, as we mentioned above, it’s important to have clear discussions with whomever you want to name about your desires as the policyholder.

6. Who should I not name as a life insurance beneficiary?

So we know that minor-children cannot directly receive a term life insurance payout, but who else should you avoid naming as a beneficiary? For one, you don’t want to name your estate as a beneficiary, even if you name other beneficiaries as well. If you do, your funds will end up in a process called probate, which is the court process of wrapping up your estate. So rather than immediately going to the intended recipients, there’s now a whole court process involved in the distribution of the funds.

7. What is a contingent beneficiary?

A contingent beneficiary is a person, estate or trust that receives the assets of a benefactor in the event the primary beneficiary, for whatever reason, cannot receive the assets. Simply put, if your primary beneficiary dies, the contingent beneficiary will receive the death benefit. We have a full breakdown of primary and contingent beneficiaries here, but just know that, the life insurance beneficiary rules suggest you list both when filling out your policy.

8. How often should I change my beneficiary list?

You should change your life insurance beneficiary list as often as needed. If one of your beneficiaries passes away, then it’s time to update. New group of people who are financially dependent on you, it might be time to adjust the list. The smart policyholder would commit to this practice regularly, not just with the beneficiary list but with their policy overall. Our needs and lives are always changing and our policies should reflect that. The beneficiary list is no different. Just consider—in the event of a tragedy, we don’t want those we leave behind to have to deal with probate, or competing interests over the death benefit. 

9. Wysh term life policies

At Wysh, one of our primary beliefs is that our policyholders should be in command of their policies. We provide flexible term life coverage that can grow with your needs as they come. If you’re in the market for a policy, try our free Wysh Builder tool right now so that you can get a fun and visual look at what your current needs are. There’s no sign up required; just take a look at what the most important financial needs in your life right now are. The Wysh Builder is a great way to not only get a visual sense of what you need, but it’s a great way to craft a policy that’s perfect for you.

TL; DR

• A beneficiary is someone who, whether naturally or legally, will receive either money or other benefits from a benefactor.
• A life insurance beneficiary is the person who will receive the policy death benefit, a lump sum payout of money.
• Life insurance beneficiaries can use the death benefit any way they see fit. It’s important for the policyholder to communicate on desired uses of the money, if there are any.
• Death benefits are not generally taxable and aren’t included in gross income.
• Beneficiaries should be chosen from a list of people who are financially dependent on you, such as a partner, spouse, children, or parents.
• Life insurance beneficiaries can also be trusts, charities or businesses in addition to listed individuals. 
• Minor-children cannot directly receive life insurance death benefits. Some states may appoint a legal guardian in charge of the funds.
• Contingent beneficiaries are people who receive life insurance death benefits in the event the primary beneficiary cannot receive the funds. Contingent beneficiaries must be chosen by the policyholder.
• Beneficiary lists should be updated whenever necessary, usually following the change of financial needs or relationship changes.