It is crucial to name a beneficiary on your life insurance policy. Otherwise, when you die, the policy becomes part of your estate and subject to probate. However, you may change your mind about who you want your beneficiary to be, in which case you have the right to change it.
In most cases, it is a simple matter to change the beneficiary on a life insurance policy. You simply need to contact your insurer and request a change of beneficiary form and fill out the form accurately and completely. Make sure to spell out the complete names of all your beneficiaries and provide their Social Security numbers to facilitate payout of benefits in the event of your death. If you name more than one beneficiary, be sure to designate how you want the death benefits distributed. If you would like professional help, our friendly agent will be happy to assist you with the process.
Consider naming three tiers of beneficiaries – primary, secondary, and final. If you do so and your primary beneficiary dies before you, or at the same time in the same accident, your death benefits will go to your secondary beneficiary. If that person is no longer alive at the time of your death, the money from your life insurance policy will go to your final beneficiary.
Please note that life insurance companies will not pay benefits directly to children. If you wish to name a child under the age of 18 as a beneficiary, you will need to set up a trust or make other legal provisions for how the funds are to be managed. In naming your beneficiaries, you should also be aware that someone receiving Supplemental Security Income or Medicaid could become ineligible for this assistance with a large payout from your life insurance policy.
Although beneficiaries are not required to pay income tax on life insurance proceeds, in certain circumstances, the payout can be treated as part of the estate. Many people who have life insurance are both the policyholder (owner) and the insured. If this is the case, changing beneficiaries will have no tax consequences. However, if you are the owner of the policy, the death benefit may be considered part of your estate for the purposes of calculating its taxable value. As of 2019, per the IRS, estate tax is only required to be paid on estates valued at $11,400,000 or higher.
If you live in a community property state, things could get tricky if you name someone other than your spouse as beneficiary on your life insurance policy. Your spouse would have to waive the right to the proceeds, even if you named someone else as the beneficiary. If you need more information on this issue, our agent will be happy to help.