The payout from a life insurance policy can help provide financial stability for your family and loved ones right when they need it. But what happens if your chosen recipient turns that money down?

It might seem unusual, but it happens. Your beneficiary has the right to refuse the proceeds of your policy. As a policyholder, it’s important to have a backup plan to make sure that your money goes where you intended.

Learn what happens when someone refuses the proceeds of a life insurance plan, along with tips to make sure your beneficiary designation does what you want it to do: protect the people that matter to you.

What happens if a life insurance beneficiary disclaims the proceeds?

A beneficiary is the person who you have named to receive your life insurance payout. As a policyholder, you have the right to choose your beneficiary. While it’s a good idea to let them know so they can claim the payout later, they don’t need to consent to being a beneficiary.

When you die, the life insurance company pays the death benefit to your chosen beneficiary. In some cases, though, your beneficiary might not be able to receive the funds. There are a few reasons why this typically happens: They’ve died before you or they might refuse the payout, which is called disclaiming the benefit.

So why would someone turn down free money? Some would-be recipients might be concerned about the effect on their finances. The payout is tax-free, but it can impact eligibility for public benefits in some cases. Your beneficiary might also want money to go to the next person in line, like a grandchild.

In those cases, the payout would go to a contingent beneficiary or other primary beneficiaries, if you have named them. Ultimately, your policy dictates who will receive the payout. The primary beneficiary doesn’t get to choose who receives their portion, and the payout from a life insurance policy is nontransferable.

How to disclaim a share of a life insurance policy

Are you on the receiving end of an unwanted life insurance payout? As a beneficiary, you have the legal right to waive the proceeds.

If you decide to forgo the money, contact the life insurance company and let them know you’re not accepting the money. Depending on the provider, you might need to submit a letter or complete a form. It’s important to do this, since it helps make sure that the money doesn’t go unclaimed and can go to the next rightful person in line.

Why should a policyholder name other beneficiaries?

As a policyholder, naming multiple beneficiaries helps make sure that the payout goes where you intended it to go. There are two different types of beneficiaries: primary and secondary, or contingent, beneficiaries. These designations spell out when someone would receive your death benefit.

• A primary beneficiary is the person or organization that you want to receive your payout first.
• A secondary beneficiary only receives the death benefit if your primary beneficiary has died, or is unable to receive the payout for any reason.

Choosing both a primary and secondary beneficiary provides a backup plan in case your original pick doesn’t work out. For example, you can name your spouse as your primary beneficiary and your adult child as your secondary beneficiary to help make sure that the payout stays within your immediate family after your death.

You can also name multiple primary and contingent beneficiaries. In that case, the primary beneficiaries would split the payout among them, and the payout would only go to any secondary beneficiaries if all the primary beneficiaries couldn’t receive the funds.

Keep in mind that your life insurance policy is different from your will. Beneficiaries listed in your life insurance policy are the ones who receive your payout, so make sure that they are up to date. Updating your beneficiaries is typically as easy as filling out a form.

Still have questions about disclaiming life insurance proceeds and life insurance beneficiary rights?

We’re here to help. Fidelity Life offers a wide variety of products to support people at every stage of life. Get your quote online today or call one of our agents at (855) 291-6365.

At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible.