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What Is a Beneficiary?

A beneficiary is any person who gains an advantage and/or profits from something. In the financial world, a beneficiary typically refers to someone eligible to receive distributions from a trust, will, or life insurance policy. Beneficiaries are either named specifically in these documents or have met the stipulations that make them eligible for whatever distribution is specified.

Understanding a Beneficiary

Typically, any person or entity can be named a beneficiary of a trust, will, or a life insurance policy. The individual distributing the funds, or the benefactor, can put various stipulations on the disbursement of funds, such as the beneficiary attaining a certain age or being married. There can also be tax consequences to the beneficiary. For example, while the principal of most life insurance policies is not taxed, the accrued interest might be taxed.

One of the most important things to determine after retiring, if not before, is that all assets will end up in the right hands. Failing to name beneficiaries could have disastrous effects on a family's financial health should you or your spouse die without making the nessicary plans.

A Beneficiary of Qualified Accounts

Qualified retirement plans, like a 401(k) or IRA, give the ability of the account holder to designate a beneficiary. Upon the qualified plan holder's passing, a spousal beneficiary may be able to roll the proceeds into his or her own IRA. If the beneficiary is not the spouse, there are three different options for distribution.

The first is to take a lump-sum distribution, which makes the entire amount taxable at the beneficiary's ordinary income level. The second is to establish an inherited IRA and withdraw an annual amount based on the life expectancy of the beneficiary, also known as a "stretch IRA." The third option is to withdraw the funds at any time within five years of the original account owner's date of death.

The Stretch Option

The stretch option is no longer available for an inheritance received in 2020, due to the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, and thus only the lump-sum and five-year rule options are available going forward. The SECURE Act stipulates that a beneficiary of a retirement account must take all distributions within 10 years.

In the event the beneficiary is either an estate or a trust, the distribution rules are more limited. Any proceeds left to the estate also make it subject to probate.

A Beneficiary of Life Insurance

Life insurance proceeds are considered tax-free to the beneficiary and are not reported as gross income. However, any interest received or accrued is considered taxable and is reported as any other interest received.

A Beneficiary of a Nonqualified Annuity

Nonqualified annuities are considered tax-deferred investment vehicles that allow the owners to designate a beneficiary. Upon the death of the owner, the beneficiary may be liable for any taxes on the death benefit. Unlike life insurance, annuity death benefits are taxed as ordinary income on any gains above the original investment amount. For example, if the original account owner purchased an annuity for $100,000 and then passed away when the value was worth $150,000, the gain of $50,000 is taxed as ordinary income to the beneficiary.

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A beneficiary is any person who gains an advantage and/or profits from something. In the financial world, a beneficiary typically refers to someone eligible to receive distributions from a trust, will, or life insurance policy. Beneficiaries are either named specifically in these documents or have met the stipulations that make them eligible for whatever distribution is specified.

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- Type of policy.
- Coverage amount.
- Term length.
- Age.
- Hobbies

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How does beneficiaries receive payment? 

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How does beneficiaries receive payment? 

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Beneficiaries file a claim and then waiting up to 30 to 60 days for the insurance company to pay out.

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A natural person or other legal entity who receives money or other benefits from a benefactor.

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It is a policy that pays a specified amount to your family or others (your beneficiaries) upon your death.

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You pay a monthly fee that splits into two parts: One covers life insurance and the other goes into savings and investment.

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Buying life insurance means buying coverage and protection for your family. Your payments, called premiums , ensure your policy is active and would pay out a death benefit to your loved ones in case the unexpected happens.

Premiums are set by your insurance company and are based on a number of factors, including your age and health, the type of policy, the term length, and whether you add on any riders. Once you sign your policy and pay the first premium, your premium rates are set for the term of your policy.

What are life insurance premiums?

To put it simply, you pay your life insurance premiums to keep your life insurance policy . As long as you pay your premiums, your life policy remains active for the policy's duration.

Permanent life insurance premiums

If you have a permanent life insurance policy like whole life insurance, the policy duration is forever (or until you're well over 100). As long as you pay your premiums, the policy will stay in force.

Term life insurance premiums

With term life insurance, your policy is set for a certain amount of time - the term. Typical terms are 20 or 30 years. You pay the policy's premiums over the course of the term, but after the term is up, your term life insurance policy expires and you no longer pay premiums or have coverage.

How often do you pay life insurance premiums?

Premiums are most often paid monthly, but you can save money by paying annually. Some life insurers offer discounts of up to 2% to 5% if you pay an annual lump sum every year rather than paying each month. Those savings can add up over the course of a few decades.

How do you make life insurance premium payments?

How to make your life insurance premium payments - that is, get your money from your account to your life insurance company's account - varies by insurer.

The most commonly accepted forms of payment are electronic funds transfer (EFT) and check, though other forms may be available from your insurance company. Most life insurance companies do not accept credit card payments beyond the initial payment, and none accept cash.
→ Read more about how to pay for life insurance premiums
How are life insurance premiums determined?

There are six main factors that determine your life insurance premium rates:

1. Type of policy

Whole life insurance policies don't expire; they keep going as long as you pay your premiums. They also have a cash value component that can gain or lose value over time and which you can tap into to receive cash or take out a loan.

Because of this, and the fees involved with whole life insurance policies, the premiums can be as much as five to 15 times as expensive as term life insurance policies. Term life insurance is much cheaper and is the best option for most people.

2. Coverage amount

More life insurance coverage costs more money. The higher your coverage amount, the higher your premiums.

3. Term length

For term life insurance policies, the longer your term is, the higher your premiums.

4. Age

Life insurance rates rise as you age, so generally, the older you get, the higher your premiums.

5. Your health, hobbies, credit score, and other factors

This is the big one. Your health history, family's health history, results of a medical exam, plus your driving history, credit score, and hobbies, are all taken into account by life insurance underwriters to assign you a health rating that will determine your premiums.

6. Riders

It's possible to add riders to your policy to add additional coverage. While some riders are free or included with your policy, others can increase your premium amounts.

Examples include:
→ Learn more about life insurance classifications
Life insurance quotes vs. life insurance premiums

Life insurance quotes are premium estimates that your life insurance broker or company will give you before and during the application process.

Life insurance premiums are set by the insurance company after your application has gone through underwriting, and are the amount you pay for your policy.

To get an idea of how quotes become premiums, there are two stages when you're likely to be given premium quotes and a final stage when you get an offer with your actual premium amount:

1. Stage one: Online quotes

When you apply for life insurance quotes online, whether directly through a carrier or a broker like Policygenius, the quotes you get are based on your personal information and a series of questions you answer about your health, family history, and driving record and we calculate what we think your premiums will be, assuming there's no other extenuating information (that's for stage two).

These quotes are as accurate as the information you have provided; the more information you share, the more accurate your quote will be.

The second phase of your life insurance application is to talk to a life insurance agent on the phone (life insurance is highly regulated, and this is a must). The agent will ask more questions to get a fuller picture of your health, and this additional information may change your estimated quotes. After your conversation, the agent will share your updated quotes.

At this point, you'll set up a free medical exam or the insurer will request your previous medical records from your doctors. You may also be asked to provide an attending physician statement (APS).

If you've been honest and thorough with your agent and no new information is uncovered in your medical exam or review of your medical records, your application should be approved at close to the rate quoted in this call.

3. Stage three: Offer after underwriting

The insurance company's underwriters will look at your application, medical exam results, and medical records and assign you an insurance classification, which will set your rates.

While your classification is set, your policy details may not be; you can decrease your term or death benefit to lower your premiums. Once you sign the paperwork and pay your first month's premium, your premium rates are set and will remain constant for the duration of the policy.

Are life insurance premiums tax-deductible?

Your life insurance premiums are not tax-deductible. But there are a few tax advantages when it comes to the life insurance In most cases, the death benefit is paid out tax-free.

There are a few exceptions: if your employer is paying your premiums for a group life insurance policy, the death benefit would be subject to taxes. Also, if the death benefit is paid to your estate instead of an individual, the estate would then be subject to estate taxes.

So while you may not get a tax break when it comes to life insurance premiums, it doesn't mean every aspect of your life insurance policy is subject to the whims of the IRS.

What if you can't pay your premiums?

If you have a life insurance policy in place and can't pay your premiums on the billing date due to a change in circumstance, insurers usually have a 30 day grace period in place before they cancel your policy. Under special circumstances, they might extend this grace period to be even longer.

For example, during the current pandemic most life insurance companies are extending grace periods to 90 days (and 60 days for some insurers). To get an extension on premium payments, you'll need to call your insurer and inform them of your present circumstance and how you are impacted financially. They may require supplemental documentation, but for many, a phone call may suffice.

If your insurer offers you a grace period for premium payments, you'll need to talk to them about setting up a payment plan to pay back the costs.

Can your life insurance premiums change?

If you purchase a term life insurance policy, you're generally buying a level term life insurance policy, which means that you will have the same premium throughout the length of the policy.

However, there is a less common term life insurance product that that does result in premium changes: annual renewable term life insurance.

Annual renewable life insurance has a term of just one year, though the policy has an option to renew after each year for a set number of years. These policies are cheaper to start, but end up being more expensive over the life of the policy. Another drawback: if you develop a terminal illness, you may be ineligible for renewal.

Life insurance premiums are one of the core elements of a life insurance policy, so it's important to understand what they are, how they work, and what they mean for your budget. Get some free life insurance quotes to see how you can work a life insurance policy into your budget before you apply. The price you'll pay in premiums is well worth the peace of mind you'll receive.

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What Is a Life Insurance Premium? | Policygenius

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Buying life insurance means buying coverage and protection for your family. Your payments, called premiums , ensure your policy is active and would pay out a death benefit to your loved ones in case the unexpected happens.

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Life insurance policy which is guaranteed to remain in force for the insured's entire lifetime, provided required premiums are paid, or to the maturity date.

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In exchange for your premium payments, the insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death.

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Life insurance that provides coverage at a fixed rate of payments for a limited period of time.