Fidelity Life: How to Choose Beneficiaries for a Permanent Life Insurance Policy

A permanent life insurance policy provides lifetime coverage plus the ability to accrue cash value. If a policyholder doesn't assign beneficiaries, the death benefit becomes part of their estate when the policyholder passes away. Among other things, that means the benefit will be taxed, whereas it would have been tax-free had it been passed directly to a beneficiary. Additionally, the estate will have to go through probate, which can be a time-consuming process.

To avoid this process and allow loved ones to receive the tax-free death benefit more quickly after the policyholder's passing, it's wise for the policyholder to assign beneficiaries. Here are some steps policyholders can take to choose a beneficiary for a permanent life insurance policy and ensure they'll get financial protection:

1. Decide who needs the financial benefits of life insurance. 

The death benefit payout from a life insurance policy is often intended for loved ones who need it most. For example, if the reason the policyholder initially bought the policy is to provide income replacement, then it makes logical sense that they designate their beneficiary as a spouse or partner who would be negatively affected by losing that income. Since life insurance death benefits often pay out much more quickly than an estate that goes through probate, assigning an appropriate beneficiary can get money quickly to those who need added financial protection. 

2. Understand who can be beneficiaries. 

A person, trust, business, or charitable organization can be named the beneficiary of a permanent life insurance policy. For someone planning to assign a person as a beneficiary, it's important to note that they must be over 18. If a policyholder desires to leave the benefit of a policy to younger heirs, it's best left to a trust that can then distribute funds accordingly. Be sure to consult with an attorney when establishing a trust.

3. Get familiar with primary and secondary beneficiaries. 

A primary beneficiary (or multiple primary beneficiaries) will receive the proceeds of a life insurance policy after the policyholder passes away. There can also be one or many secondary or contingent beneficiaries who will receive the death benefit if primary beneficiaries predecease the policyholder.  

When assigning multiple beneficiaries, people often assign them as either:  

• Per capita, meaning the death benefit is split equally between any living beneficiaries.   
• Per stirpes, meaning the death benefit would pass through to a deceased primary beneficiary's heirs. For example, if a policy has two siblings assigned as beneficiaries, but one predeceases the policyholder, their portion of the death benefit would pass to the deceased beneficiary's children and be split accordingly. 

4. Learn any state-specific laws.  

Certain states designate marital assets, like a permanent life insurance policy, as community property. In those states, a spouse may have a right to claim some of the death benefits if the premiums were paid with the couple's "community" money. It can be smart to work with a lawyer if someone lives in a community property state and wants to list someone other than their spouse as the beneficiary of a life insurance policy. 

5. Keep beneficiaries updated. 

Choosing appropriate life insurance beneficiaries can give policyholders and their families peace of mind. But keeping beneficiaries updated is critical to ensure the death benefit gets in the right hands. Significant life changes, like marriage, divorce, or the birth of a child, are great times to review and update the beneficiary list. 

The bottom line

Before choosing beneficiaries for your permanent life insurance policy, it's important to consider who needs the financial support of the policy most, who is eligible to be a beneficiary, and how many primary and secondary beneficiaries will be assigned. Once the policyholder has a list of beneficiaries, they should check any state-specific laws and consult with a financial professional as needed. Then, it's a matter of assigning the beneficiaries and keeping that list updated as life circumstances change.

For all media inquiries, contact: 

Laura Zimmerman, Chief Marketing Officer

[email protected], (312) 288-0068