Life Insurance Beneficiary: A Complete Guide


What is a life insurance beneficiary?

Your life insurance beneficiary receives the death benefit if you die while the policy is still active. This means that choosing your beneficiary is an important step in having a life insurance policy. After all, your beneficiary is probably the reason you have life insurance in the first place.

But deciding who gets paid may not be as simple as you think – state laws and policy rules can influence or even restrict your options. Before putting pen to paper, read the fine print and become familiar with how your life insurance company treats beneficiaries.

Who can be a beneficiary of life insurance?

Almost anyone can be a beneficiary of life insurance, including individuals, organizations, and trusts. Here are some common examples of life insurance beneficiaries:

  • A person, like your spouse.

  • Various people, like your children.

  • A charity organization.

  • A legal entity, such as your business.

Some insurers place limits on the number of beneficiaries you can name. If your policy has a limit, be selective when compiling your list.

Primary beneficiary versus contingent beneficiary

Beneficiaries of primary life insurance They are first in line to receive the death benefit if you die.

Contingent Life Insurance BeneficiariesSometimes called secondary beneficiaries, they receive the death benefit if the primary beneficiary dies before you.

In some cases, you can name a final beneficiary of life insurance, who receives the money if both the primary beneficiary and the eventual beneficiary die before you.

Multiple beneficiaries

If you name multiple beneficiaries, whether primary or contingent, you can choose how much of the payment each party receives. For example, if you name your spouse, child, and a local charity as primary beneficiaries, you can assign 50% to your spouse, 30% to your child, and 20% to the charity. It doesn’t matter how you split the life insurance payment among the beneficiaries, the percentages must add up to 100%. If you don’t list the percentages, the insurer can award equal shares to each beneficiary.

Irrevocable versus revocable beneficiaries

You cannot change a irrevocable life insurance beneficiary designation without beneficiary approval. For this reason, irrevocable appointments are not common. However, they can be useful if you want to ensure that the death benefit reaches a specific person, such as your child.

In contrast, a revocable life insurance beneficiary the designation is flexible. You can change, update, add, or delete a revocable beneficiary at any time. This gives you the freedom to update your designation to match your current needs.

Choosing a life insurance beneficiary

This decision is not always easy. The correct choice may not be the most obvious option. Start by wondering why you have life insurance in the first place:

  • Who is financially dependent on you and would need help paying ongoing bills if you die?

  • Who would need financial support to cover the costs incurred for your death, such as funeral expenses?

  • Who would you like to leave money behind regardless of whether they depend on you, such as a charity or a trust for your children?

Be sure to include any identifying factors, such as each beneficiary’s full name, social security number, relationship to you, date of birth, and address, so that the insurer can quickly locate your beneficiaries. Check with a legal professional to make sure you are using the correct language.

Once you narrow down your options, ask yourself how much money each beneficiary would need, and divide the death benefit accordingly.

Name the children as your beneficiaries

Naming your children as beneficiaries of life insurance may seem like a sensible decision. But if you die while you are still a minor, you may not receive the funds until you reach the “age of majority,” usually 18 years. A delay can be frustrating, especially if your child needs the death benefit to cover immediate living expenses.

There are ways to get around this problem and make sure your children have access to the death benefit without having to wait to reach the age of majority:

Appoint a Guardian

Many states allow legal guardians to receive payments on behalf of minors. You can appoint a legal guardian before your death, or the guardian can request rights after your death. In either case, the state must give the guardian legal rights to manage the child’s finances. Appointing a guardian can be a long and expensive process, so consult an attorney before proceeding.

Establish a trust

Trusts can be effective solutions to leaving money for children. You can establish a life insurance trust for your children and have the trustee monitor the funds and distribute the money according to your wishes. However, there are costs involved and the trust must be valid and active at the time of your death.

Name your estate as your beneficiary

Even if you have a will, your estate, including the death benefit, can be held in probate court, delaying payment and costing your estate money. If, instead, you name a specific beneficiary on your life insurance policy, the funds go directly to the beneficiary without being involved in your estate.

Naming your estate is not necessarily a wrong move, but be sure to consider all the inheritance tax and hereditary implications before selecting you as a beneficiary.

What happens if you don’t name a beneficiary?

If you don’t name a beneficiary, the insurer generally issues the death benefit to your estate. However, in some cases, insurers distribute the death benefit according to a specific order described in the policy. This order can vary, so make sure you know who is first in line before leaving the payee box blank.

Community property states

Your life insurance payment can automatically go to your spouse, regardless of whether you name a beneficiary, if you live in a community property state, which considers you and your spouse equal owners of all your joint property. To prevent this from happening, your spouse must give written consent to the designated beneficiary before you die.

States with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Three other states, Alaska, South Dakota, and Tennessee, have elective community property laws, meaning that married couples can choose to have the same property as their joint property. As such, if you chose to adhere to community property laws when you were married, your spouse must consent to the beneficiaries named on your life insurance policy.

Change, add and delete beneficiaries

You can generally change, add, or remove revocable life insurance beneficiaries at any time. The methods for doing this vary between insurers. Some companies may require a beneficiary change form signed by a witness, while others allow you to update your beneficiary online.

When to change your life insurance beneficiary

It’s important to reevaluate your life insurance beneficiaries after major life changes to make sure the right people are protected. Here are some situations that may ask you to review your previous selections:

  • You get married and you want to add your new spouse as a beneficiary.

  • You divorce and you want to remove your ex-spouse from the policy and name a child, trust, or close family member in their place.

  • He has children and you want to add them to your beneficiary list.

  • Your children are no longer financially dependent on you and you want to adjust your percentages or assign a spouse instead.

  • Your beneficiary dies and you want to change or edit your choice.

Encourage your beneficiaries to learn how to make a life insurance claim so they are better prepared if you die. Not all states require insurers to notify beneficiaries of a death, which means they may need to contact the insurance company directly. The National Association of Insurance Commissioners (NAIC) has a policy localization service to help beneficiaries find unclaimed policies.

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