How Is Payment Made to Beneficiaries on a Life Insurance Policy?

If you want your beneficiaries to collect on your life insurance policy, tell them it exists. Your life insurance company may not notify your beneficiaries when you die, which leaves it up to the them to contact the insurer. Although several large companies agreed in 2012 to work harder at finding beneficiaries, it's still wise to let your beneficiaries know about whatever policies you've taken out.

Making Contact

Life insurance proceeds don't go through probate, so it's not your executor's job to contact the insurer. The beneficiary can either call your insurance agent or go to the company's website. Usually the first step to collecting on the policy is to send in a form reporting the death. The company sends the beneficiary more forms to fill out; she sends them back along with a copy of the death certificate. If the primary beneficiary dies before collecting, the secondary beneficiary has to send in the primary beneficiary's death certificate as well as yours.

Options

Most life insurance policies pay out simply -- one lump sum, which is divided up if there are multiple beneficiaries. Depending on the insurer, your beneficiaries may have other options. Common options include payments stretched out over a fixed number of years, or a fixed dollar amount paid until the money runs out. The beneficiary may also be able to choose a lifetime income or to take interest-only income while the insurer holds onto the policy proceeds.

Taxation

If you take out $200,000 in life insurance and it pays your beneficiary $200,000, there's no tax on the payout. If your company has invested your premiums to the point your beneficiary gets more than the face value, however, your beneficiary has to pay tax on the excess. If the company pays in a lump sum, the beneficiary pays the year he receives it. If the payoff comes in regular installments, a portion of each year's payments is going to be taxable.

Considerations

When it comes time to pay your beneficiary, it's not the insurer's job to fathom what you really meant on the beneficiary form. If you want your children as beneficiaries, for example, you need to specify whether that means all your biological children, only those from your current marriage, or all your stepchildren as well. Also consider what happens if one of your kids dies before you: you can divide his share among your other children, or have it pass to his children, your grandkids. If you don't think it through, payments may not be made the way you want.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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