Some structured settlements are life-contingent, meaning that your payments will only be disbursed while you are still alive. Because these payments will cease upon your death, they cannot be inherited by a beneficiary.
Who can inherit my payments?
When you’re deciding who will inherit your structured settlement funds after you die, you have a few options.
- Primary beneficiary – This is the first person in line to inherit your settlement payments when you pass. You can have multiple primary beneficiaries, called co-beneficiaries, among whom you may divide the payments either equally or by percentage.
- Secondary beneficiary – Also known as a contingent beneficiary, this is the person (or people) second in line to receive your settlement funds when you die. If the primary beneficiary dies before you do, the contingent beneficiaries will receive the payments.
- Trusts – You can choose to name a trust as a primary beneficiary. In this case, you will create pre-defined rules for your trust, and the trustee will disburse payments based on those rules. Trust payments count as taxable income to the recipients.
- Donations – You may wish to leave your remaining payments to a non-profit organization that accepts donations by naming them as a beneficiary.
You can name and/or change your beneficiary or beneficiaries at any time by contacting the insurance company that disburses your payments. In fact, many people choose to revisit who their beneficiaries are regularly, accounting for major life events like marriages, births, deaths, and so on.
What if I don't have a beneficiary?
If you do not name any beneficiaries to inherit your structured settlement payments, then your payments will be made to your estate. If one of your loved ones wishes to claim those payments after your death, the remaining value of the structured settlement must go through estate probate, meaning that any fees or charges on your estate could come out of the remaining settlement amount.
Because the probate process can be costly and complex, many people prefer simply naming a beneficiary by contacting the insurance company disbursing their payments. This is an effective way for you to clearly delineate who will receive your payments when you pass, which can help your loved ones avoid confusion and conflict.
What are my beneficiary’s payout options?
As noted above, the person who inherits your structured settlement payments may receive a lump sum at the time of your death if your settlement includes a commutation rider.
If you are married, your spouse can also opt to become the legal owner of your settlement payments through a process called spousal continuation. This option allows your lawful partner to continue receiving payments and retain their tax-free status.
It’s important to note that any beneficiary who inherits the rights to your structured settlement payments after you pass can sell part or all of the payment stream for a lump sum if they choose. Naming a beneficiary for your payments will allow them to either receive a steady income or cash out on the payments when they have an emergency.