Typically, when we talk about life insurance, it’s in regards to finding the right policy for you and your loved ones. However, the conversation is typically from the side of the policyholder. However, what if you’re the beneficiary of someone’s life insurance? What do you do, how do you file a claim, how long do you have to wait?
These are the questions that we’ll get into, along with plenty of others. Today, we’re going to explore life insurance policies from the perspective of a recipient, not a buyer. While you may not have to worry about being a life insurance beneficiary right now, this information will come in handy someday.
Life Insurance Beneficiaries: A Primer
Before we get into specific details regarding what to do as a beneficiary, let’s break down how life insurance recipients can be chosen. The beneficiary process is crucial when drafting a policy, and understanding the various rules and limitations will help you when it comes time to file a claim.
Who Can Be a Beneficiary?
Technically speaking, anyone can be named a beneficiary of a life insurance policy. Not only that, but policyholders can list multiple individuals if they like. Death benefits can be paid in a variety of combinations – for example, you could name your partner and a charity organization as equal recipients.
However, while anyone can be named as a beneficiary, there are typically two types of persons that get listed the most – spouses and children. If you live in one of the following states, you fall under community law guidelines, which state that a spouse must be named the sole beneficiary of a life insurance policy. If you put someone else, you will be violating the law, which could cause a denial of the claim.
- New Mexico
In these places, if you want to name someone besides a spouse, your significant other will have to sign a waiver allowing you to do so. Be sure to pay close attention to your state’s regulations surrounding life insurance so that you don’t make a mistake when designating a beneficiary. Also, if you decide to get multiple policies, you will have to get waivers for each one that won’t go to your spouse.
For those who divorce and remarry, it’s crucial to amend your beneficiaries as soon as possible, One of the worst situations you could create for your loved ones is when a life insurance policy still has an ex-spouse listed. Not only could it violate the community-property law, but it will cause numerous issues with your family when they discover the error.
What if a Life Insurance Beneficiary is Under 18?
After spouses, children are often the primary beneficiaries of life insurance policies. However, you need to be careful when naming underage kids.
You will have to create a trust or name someone else to manage the funds until the child comes of age. Unfortunately, if you don’t set this up beforehand, the courts will designate a guardian for the money, which can take time and deduct a substantial chunk from the payout.
For policyholders that do want to name a minor, it’s best to consult with an attorney before finalizing any plans. This way, you can make sure that you’re doing the right thing and creating a smooth transition if the worst is to happen. You certainly want to avoid putting your children in a complex legal situation, particularly when they’re still reeling from your passing.
Other Notes Regarding Life Insurance Beneficiaries
When drafting a life insurance policy, you must understand all of the finer details, particularly relating to beneficiaries. Here are a few other considerations to make when planning for a worst-case scenario.
Tell Your Beneficiaries They Are in Your Policy
One issue that many families run into is that the policyholder doesn’t notify the beneficiaries that they are listed. When this happens, it can lead to complications, especially when trying to file a claim. As we’ll get into, beneficiaries need multiple documents, which can be challenging to obtain when they’re not aware of the insurance plan in the first place.
Name Multiple Beneficiaries
You can designate primary and secondary/contingent beneficiaries within your plan. Having a backup helps just in case the insurance company is unable to reach the first person.
Also, if a primary beneficiary dies before you, you want to make sure that your death benefit still goes to someone that you’ve intended. Even if you don’t have any additional loved ones, naming a charity is an excellent way to ensure that your policy does some good.
Consider Other Benefits (i.e., Government Assistance)
In some cases, the primary beneficiary may be receiving income-related assistance, either from the government or some other entity. Unfortunately, a life insurance payout could affect these benefits, potentially putting your loved ones in jeopardy of losing them for good.
While your insurance payout may be substantial, it may not be enough to cover the beneficiary for life. If you’re worried about accidentally kicking a loved one off of assistance, be sure to set up a trust beforehand. Again, talk to an attorney about the best course of action.
Life Insurance Benefits are Not Beholden to Wills
When you die, chances are that you’ll be passing on various assets and holdings, all of which will require a will or living trust. It’s easy to assume that your last will and testament will override your life insurance policy, but that’s not the case.
Even if you amend your will to name a different beneficiary, the insurance company will award benefits based on internal records. So, if you’re updating one, you have to update the other. Otherwise, you could be creating a messy situation.
What to Do As a Life Insurance Beneficiary
Now that we understand the various elements of naming beneficiaries in life insurance, let’s discuss the process for filing a claim and receiving a death benefit.
While it can seem insensitive to seek money after a loved one has died, the fact is that you want to make this process as smooth and streamlined as possible. Preparation is critical, which is why life insurance policyholders need to inform their beneficiaries before the worst happens.
So, with that in mind, let’s go over the steps necessary to get death benefits.
Step One: Collect Your Documents
As we mentioned above, you will have to submit several documents to the insurance company to collect funds. As a rule, the three items you’ll need include:
- Death Certificate – you will have to get a certified copy of the death certificate and present it to the insurer. This document is necessary to avoid fraud and to ensure that the company finds the right policyholder.
- Policy Document – be sure to talk to your loved one to see where this document may be stored. This paper will outline the different details regarding the plan, including the type of insurance (i.e., term or whole), the death benefit amount, and information about the policyholder.
- Claim Form – as a beneficiary, you will need to provide various details before you can receive your claim. Some of these items can include your relationship to the policyholder and how you would like to be paid.
Fortunately, there is no statute of limitations on when to collect and submit these forms. So, don’t worry about having to file a claim within a few days or weeks after losing a loved one. While it’s typically best to move things along as early as possible, you can take care of everything else before worrying about a life insurance claim.
Step Two: Contact the Insurance Company
Once you have your documents in hand, contact the insurer, and submit everything. Depending on the situation, it may take a little while for the company to verify details and get a claim check ready. They will want to make sure that everything matches what is in their records so that there aren’t any potential errors during the claim process. Some issues that may arise:
- Incorrect Name – perhaps your loved one put you down before you got married and changed your last name. Or maybe there was a typo in the system.
- Lapsed Coverage – if your loved one stopped paying premiums for any reason, it could lead to a denial of benefits. Also, term insurance is only valid for the length of the term. If your loved one died after that term ended, you won’t receive a payout.
Typically speaking, you can expect to receive the death benefit within 30 days, although in some cases, it may take up to two months. However, during that time, the money can collect interest, so many insurance companies will try to expedite the verification process to avoid paying additional benefits.
Step Three: Determine Your Payout Options
As a rule, there are two primary ways that you can receive your funds – as a lump sum or as annuity payments. Let’s break down the different ways that these options can work for you.
In this case, you receive the full death benefit as a single payment. Usually, the insurance company will issue a check. But, some may allow for a direct deposit into a bank account of your choice.
There are a few benefits of getting a lump sum. First, life insurance payouts are tax-free, so you don’t have to worry about paying taxes. Best of all, you don’t have to report it as income, so your current tax bracket won’t be affected either.
However, if you are receiving certain benefits or assistance, a life insurance payout could affect those. So, be sure to talk to an attorney or financial advisor.
Not all insurance companies offer this option, but you may be able to roll your death benefit into an annuity. In this case, the money is invested and paid to you annually for a predetermined number of years.
The primary benefit of getting an annuity payout is that you may earn interest on top of the lump sum. However, keep in mind that any earnings will be taxed and will have to be reported in that tax year.
A potential downside of an annuity payment is that if you pass before the payments end, it won’t pass on to any of your loved ones. When setting up an annuity payout, be sure to set a realistic time frame to receive the full sum. Or, just choose a lump sum payout which is typically recommended.
Potential Issues When Filing a Life Insurance Claim
For the most part, getting a death benefit is a relatively straightforward process. Again, it can be a bit uncomfortable to profit from the loss of a loved one. But, you have to remember that it was his or her wish. Financial stability is always good. The policy likely provided peace of mind to your loved one while he or she was alive.
That being said, there may be some issues with your claim that could lead to a denial. Let’s break down the potential obstacles that you may face.
All life insurance policies come with this clause to help protect the interests of the insurer. Typically, this covers a two-year period after the plan went into effect. If the insurance company feels that there was any kind of fraud (i.e. lying on the insurance application), they can deny the claim outright.
If there is no reason to suspect fraud, you don’t have to worry about the contestability clause taking effect. Generally speaking, as long as a life insurance policy is active, beneficiaries can receive a payout. This is even if the plan is still relatively new.
Fraudulent behavior isn’t the only reason a claim may be denied. If the policyholder commits suicide within two years of obtaining life insurance, the insurer will deny any payout benefits.
In some cases, suicide at any point during the life of the policy could void it. If your loved one did commit suicide, you would have to check for a suicide clause within the policy.
Illegal or Dangerous Activities
Another reason why insurers will deny a death payout is if the policyholder was doing illicit or dangerous activities at the time of death. For example, if your loved one was illegally drag racing and crashed, that will likely lead to a denial. Similarly, if the policyholder died from a drug overdose, that will void the insurance payout as well.
Contact Us Today
If you want to avoid any problems with your loved ones, be sure to get the right life insurance policy. At NextGen Life Insurance, we make it easy to compare plans and rates so that you and your loved ones are covered for anything. Contact us today.