What Happens if You Don’t Have a Life Insurance Beneficiary?

Senior woman looking out the windows of her home.

They say that life insurance is a selfless act of love.

That’s because you buy life insurance to benefit others—not yourself. You’ll never see the death benefit from your life insurance policy, but your loved ones will. And with it, they can help pay your final expenses, replace lost income, cover living expenses, fund college, save for retirement and so much more.

With that in mind, choosing a beneficiary is an important part of purchasing life insurance. A beneficiary is the person, people or entity that you designate to receive the proceeds of a life insurance policy. Your beneficiary could be your spouse, child, parent, sibling or another loved one. You could also name a trust or a favorite charity as your beneficiary.

But what happens if you pass away and don’t have a life insurance beneficiary? Let’s explore a couple of situations where this could happen and possible outcomes.

  • Primary Beneficiary is Unavailable and There Aren’t Contingent Beneficiaries
    Usually, when you buy life insurance, you’re asked to name a primary and contingent beneficiary. The primary beneficiary is the person who will receive the proceeds of your policy when you die. The contingent beneficiary doesn’t receive any of your death benefit unless the primary beneficiary isn’t available (perhaps if they’ve died, aren’t eligible, or aren’t available for any reason). If both of these people have passed away, aren’t eligible, or aren’t available, then your policy doesn’t have a beneficiary.
  • You Pass Away Without Ever Naming a Beneficiary
    Sometimes people aren’t sure whom to choose for their beneficiary, so they decide to think about it and select later.  If you pass away without ever deciding and letting your insurance company know, then your policy doesn’t have a beneficiary.

What Happens if You Don’t Have a Life Insurance Beneficiary?

First, let’s cover what happens when there is a beneficiary. When you pass away, your named beneficiary receives your death benefit directly from your insurance company. The proceeds don’t typically go through probate, your beneficiary doesn’t need to pay taxes on the money, and if you have debt your creditors can’t access the money.

When there isn’t a beneficiary, the death benefit is often paid out to your estate. The proceeds will then go into probate and be distributed according to your will, your insurance contract details and state law. The probate process can take a long time—a year or longer—and this process typically involves valuing your assets, paying taxes and debts, and then distributing remaining assets. After it’s all said and done, your family might receive a payout, but it could be much less than the intended death benefit due to taxes and debt payoff.

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The Importance of Naming a Beneficiary—and Keeping it Up to Date

As you can see, not naming a beneficiary could result in a lengthy and costly process for your loved ones. Here are some simple tips to help you name an eligible beneficiary and ensure your proceeds are passed down in the way you choose:

  • Avoid designating your estate as your beneficiary. This results in your proceeds going through probate.
  • Be specific when naming your beneficiary and include their full name, Social Security number and date of birth. Avoid being general and naming “spouse” or “children.”
  • Avoid designating a minor as your beneficiary; children can’t receive benefits. Instead, consider setting up a trust.
  • Avoid designating a pet as your beneficiary. Animals can’t receive proceeds, but you could create a trust to provide for your pet.
  • Avoid naming an incapacitated beneficiary. If your beneficiary isn’t in control of their own decisions when you pass away, they may be ineligible to receive the proceeds. Instead, you could establish a trust with a trustee who can manage the money for your intended beneficiary. 
  • Review your beneficiaries annually and update if needed. As you and your beneficiaries go through life stages, you may find it necessary to make changes to reflect new circumstances.

We hope this information helps you better understand what beneficiaries are and the importance of naming a proper primary and contingent beneficiary. If you every have questions about the beneficiaries on your Colonial Penn life insurance policy, we’re here for you.

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