Quite often, people are confused about who gets the life insurance payout. What if during the duration of the policy you have more children, not specified as beneficiaries in your previously created insurance? What if you decide to have a separate will? Or simply change your mind about the beneficiaries during the duration of the policy?
Don’t worry. Many people ask these questions. Let’s see the answers.
Case 1: the insured person getting the payout
The two most common types of life insurance are term life insurance and permanent insurance, a.k.a. universal or whole life insurance.
Term insurance covers the policyholder a specified period of time. This can be 15 or 20 years, for example. Term insurance has two subtypes: saving and non-saving insurance.
Again, from the name, you can guess that with saving term insurance, at the end of the term you, as the insured person still alive and kicking, get the payout. With non-saving term insurance, at the end of the period, even if you, as the insured person, are still alive and kicking, you don’t get anything.
Permanent insurance doesn’t expire, i.e., it is valid all your life. This means that in contrast to term insurance, the insured person doesn’t have a chance of getting the payout – everything goes to the beneficiaries.
Of course, in reality, there are some exceptions. For example, some insurance providers might allow you to take a loan as part of your insurance payout, which you can spend while you are alive. But these are the exceptions. The norm is that the insured person can get the payout only with term life insurance with a savings component.
Case 2: the beneficiaries getting the payout
If the insured person dies, the payout is paid to the beneficiaries appointed in the policy. The insured person is free to assign beneficiaries – either one person or many people. Most insurance providers also allow the policy owner to set a hierarchy of beneficiaries, i.e., a primary beneficiary, who receives the payout, and a secondary (a.k.a. contingency) beneficiary who receives the payout if the primary beneficiary is not alive when the payout is triggered.
Some insurance providers allow the owner of the policy to change the beneficiaries during the term of the insurance. Other providers don’t allow this. Make sure you ask for that option when you choose your insurance company.
Keep in mind that although insurance policies are fairly similar around the globe, there might be some important differences due to local legislation. Always check with your insurance provider about this. Should you appoint your “children” as beneficiaries or name each of them? In the latter case, what will happen if you have more children born during the term and, as a result, their names are not on the beneficiary list?
There are too many caveats to be listed here, and their answers depend largely on your location and the local legislation. So, in addition to all the major features of your life insurance, make sure you clarify all the smaller details with your provider. They might have a big impact on who receives the policy payout.
Case 3: Your payout stays in the insurance company
There is a very important aspect related to your life insurance payout. It is a fact that even if you have designated a beneficiary or beneficiaries, who are entitled to the insurance policy payout, it doesn’t mean that they will actually receive the payout.
How is that possible? Unfortunately, quite easily. Life insurance providers don’t have the legal requirement to inform your beneficiaries about the payout, even if they are completely aware of who the beneficiaries are and how to contact them.
Life insurance providers don’t have the legal requirement to inform your beneficiaries about the payout.
This means that even if you have the perfect life insurance policy and clearly designated beneficiaries, they will receive the payout only if they are aware of your insurance policy so they can identify and submit a claim.
This is sometimes tricky even for the primary beneficiary, e.g., your partner. But for the secondary or contingent beneficiaries, chances are high that they are not aware of the policy and, as a result, will not receive the payout.
Who gets the payout in this case? You have probably guessed the answer. Your money stays with the life insurance provider.
How big is the problem?
The famous Californian attorney James L. Cunningham, Jr. puts it well in his book Savvy Estate Planning: “According to CBS News, about $1 billion in life insurance claims goes unpaid every year. That’s because even though the insurance company knows you are dead, they have no affirmative obligation to reach out and pay the money to your beneficiaries.
The beneficiary has to submit a claim, but if the beneficiary doesn’t know about the policy, that claim will never be submitted. The insurance company knows you have passed, they know who the beneficiary is, but if no one steps forward, the company holds on to the money. I find this shocking.”
$1 billion per year just in the United States and only for life insurance. How big is the problem of protecting all types of assets from these risks? It’s huge. So-called unclaimed assets approach $100B in the US alone. Latest reports for the UK show £77B. Globally, we are talking about trillions of dollars. And the upward trend is alarming – a $5B increase per year in the USA alone.
Digital inheritance to protect your beneficiaries
Digital inheritance is very helpful when it comes to ensuring that your loved ones are aware of your assets, such as life insurance and bank accounts, and, as a result, can identify and claim them.
Digital inheritance services combine a few distinctive characteristics:
- Secure storage of asset catalogs
Usually, data is protected through encryption and stored in secure data centers, rather than in public clouds.
- The ability to designate beneficiaries
Usually, these are family members and close relatives. Typically, digital inheritance tools enable the user to choose whether the beneficiaries are to be informed about the assigned assets immediately or only in the case of an unforeseen event.
- A mechanism for the detection of an unforeseen event happening to the user
This is a critical aspect of digital inheritance – the ability to detect whether something has happened to the user. The tools usually implement multi-step processes to ensure that such an event is detected.
- Additional support for the beneficiaries
As mentioned, this support is especially useful if the beneficiaries are not financially proficient or are elderly people or young children, or if your assets are complex and in multiple countries.
- The ability to notify the beneficiaries
If an unforeseen event is detected, digital inheritance services have the ability to automatically inform the designated beneficiaries.
Digital inheritance tools ensure that your loved ones will be automatically informed about your assets so they are aware of them and can identify them.
The last is a key difference between digital inheritance tools and other alternatives. Digital inheritance ensures that notification of the assigned beneficiaries will be handled even without external intervention, while the alternative methods rely on external activity – people have to have access and proactively access the information.
With digital inheritance, in the event of anything unforeseen happening to you, your loved ones are aware of your assets. They can identify and locate your assets and can minimize the chance of unclaimed assets.