The Life Policy Beneficiary

The beneficiary of a life insurance policy is the person named to receive proceeds upon the death of the insured.

Sometimes, a business entity (eg. corporation) will be the applicant of the policy. For example, the insured may be a key employee whose premature death would jeopardize the earnings of the company. The policy death benefit in such an occurrence would help offset this loss of earnings... at least until such time as the company could replace the key person.

In the typical life insurance situation, the applicant is the insured party and the designated beneficiary is the insured's spouse or children. The insured/applicant is typically the policyowner and retains all rights to change the designated beneficiary without the beneficiary's consent.

When the beneficiary arrangement can be changed by the policyowner without consent, this is referred to as a revocable designation. This means that the beneficiary can expect to receive the death proceeds at the insured's death, but there is no guarantee that this expectation will be realized.

Sometimes the beneficiary designation is irrevocable, which means the policyowner can not exercise a change without the beneficiary's prior consent.

Nevertheless, an irrevocable beneficiary's vested right is subject to other possibilities of termination. For instance, the policy must be in force at the death of the insured or there will be no benefit to which anyone will have a right.

Most life insurance companies require the beneficiary to have an insurable interest in the insured. This is especially true when the policy is applied for by someone other than the person whose life is insured.

As a matter of practice, an insurer's underwriting office will probably inquire fully into the reasons for naming as beneficiary a person who appears to have little insurable connection with the proposed insured.

A policyowner indicates during the application process one or more persons who shall be the designated beneficiary. The death proceeds will be paid to such primary beneficiary as long as they survive the insured party.

If, however, the primary beneficiary dies prior to the insured's death, a contingent beneficiary will be paid. Unless the insured had designated the name of the contingent beneficiary, the death proceeds will typically be paid to the insured's estate.

There are optional ways to settle a death claim. In most circumstances, a lump-sum is paid directly to the named beneficiary. But, there are other options available to the policyowner.

These include instructing the insurance company to pay the death proceeds over a specified period of time... rather than all at once. If, at time of application, the owner did not select a settlement option, most insurance companies will pay a lump-sum to the designated beneficiary.

Recently, some major insurance companies have defaulted their settlement option to provide a checkbook for the beneficiary's use. The money remains in an interest bearing account with the company and the recipient is permitted to either liquidate the entire amount all at once or spend down the balance over time.

Take whatever time is necessary to locate and interview a qualified life insurance agent because they can help you choose the appropriate options.