What Is Life Insurance Beneficiary? All You Need To Know

When buying life insurance, it’s crucial to name a life insurance beneficiary. They will be the ones to receive the death benefit if you die while the policy is still in force. This means choosing your beneficiary is an important step in owning a life insurance policy.

After all, your beneficiary is probably the reason you have life insurance in the first place.

But deciding who gets the payout may not be as simple as you think — state laws and policy rules can influence or even restrict your choices. You need to read the fine print and become familiar with how your life insurance company handles beneficiaries.

Who is a beneficiary?

A beneficiary is the person or entity you name in a life insurance policy to receive the death benefit. You can name:

One person
Two or more people
The trustee of a trust you’ve set up
A charity
Your estate

If you don’t name a beneficiary, the death benefit will be paid to your estate.

Levels of beneficiaries

Your life insurance policy should have both “primary” and “contingent” beneficiaries. The primary beneficiary gets the death benefits if he or she can be found after your death. Contingent beneficiaries get the death benefits if the primary beneficiary can’t be found. If no primary or contingent beneficiaries can be found, the death benefit will be paid to your estate.

As part of naming beneficiaries, you should identify them as clearly as possible and include their social security numbers. This will make it easier for the life insurance company to find them, and it will make it less likely that disputes will arise regarding the death benefits. For example, if you write “wife [or husband] of the insured” without using a specific name, an ex-spouse could claim the death benefit.

On the other hand, if you have named specific children, any later-born or adopted children will not receive the death benefit—unless you change the beneficiary designation to include them.

Besides naming beneficiaries, you should specify how the benefits are to be handled if one or more beneficiaries can’t be found. For example, suppose you have two children and you name each one to receive half of the death benefit. If one of the children dies before you do, do you want the other child to get the entire death benefit, or the deceased child’s heirs to get his or her share?

Choosing beneficiaries, and keeping those choices up-to-date, is an important part of owning life insurance. The birth or adoption of a child, marriage or divorce can affect your initial choice. Review your beneficiary designation as new situations arise in order to make sure your choice is still appropriate.

Who can be a life insurance beneficiary?

You can name anyone as a life insurance policy beneficiary. You can name family members, friends, charitable organizations, children or the guardians of your children. Trusts can also be named as beneficiaries.

Some state laws may require you to name your spouse as your primary beneficiary, getting at least 50% of the benefit. In some states, you may be able to name someone other than your spouse as a beneficiary if you have documented permission from your spouse to do so.

The nine community property states that say a spouse has a right to 50% of a life insurance death benefit are:

Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin

Insurable interest

The beneficiaries you choose when you purchase a policy must have an “insurable interest” in your life. This means they have more to lose than gain by your death, whether that’s financial or otherwise. Most insurers will ask you to list the relationship you have with a beneficiary when you fill out the form (for example, “spouse,” “friend” or “domestic partner”).

How to choose a life insurance beneficiary

Naming a life insurance beneficiary is an important way to provide funds for those who will need financial support when you pass away. This is often a spouse or adult child.

Designating a beneficiary

Multiple beneficiaries

If you name multiple beneficiaries — whether primary or contingent — you can choose how much of the payout each party receives. For example, if you name your spouse, child and a local charity as primary beneficiaries, you might allocate 50% to your spouse, 30% to your child and 20% to the charity.

No matter how you divide a life insurance payout among beneficiaries, the percentages must add up to 100%. If you don’t list the percentages, the insurer may grant equal shares to each beneficiary.

Irrevocable vs. revocable beneficiaries

You cannot change an irrevocable life insurance beneficiary designation without the beneficiary’s approval. For this reason, irrevocable designations aren’t common. However, they can be useful if you want to make sure the death benefit reaches a specific person, such as your child.

Irrevocable designations can be used in a divorce agreement to ensure a former spouse isn’t removed from the policy without consent. They’re also sometimes used in certain business situations, such as to guarantee repayment of a loan.

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

Deciding how the death benefit will be paid

There are also options when choosing how the death benefit will be paid to beneficiaries.

Per capita (by “head”). The amount is split equally among all beneficiaries, often among children.
Per stirpes (by “branches”). This means that if a child predeceases the policyholder, his or her children—the branches—receive what would otherwise be shared among the living children. Per stirpes is a valuable tool for protecting grandchildren, particularly if they’ve lost a parent.

Setting up a Trust

When it comes to protecting grandchildren, nothing works as well as setting up a trust for all, or at least some, of the money from your policy.

With a trust, the life insurance proceeds automatically go into the trust and can be distributed according to the trust’s rules.

Tips for choosing a life insurance beneficiary

Keep the purpose of the life insurance policy in mind 

The reasons why you’re buying life insurance should drive your choice. Do you want to provide financially for your family after you’re gone? If so, your spouse might be the best choice. If you want your company to continue, it might be your business partner.

Choose a policy and life insurance beneficiary that helps you continue your goals.

Know your options

When choosing a life insurance beneficiary, there are more options than your spouse or kids. Generally, if you own the policy on yourself, you can designate any one or more of the following as a beneficiary: 

One person – when paid directly to a person(s), death benefits are generally tax-free 
Two or more people (and you decide how the benefit is split among them)
A trust you’ve established
A non-profit or charity
Your estate (this is generally not recommended since it can trigger tax consequences, cause delays, and may result in proceeds not being paid out as you intended – see #10 below)

You can also decide if the life insurance proceeds will be paid out in one lump sum or a series of payments. 

Keep your life insurance policy up-to-date

One of the most common oversights with a life insurance policy is not keeping the beneficiaries up-to-date. Say you’re single and name your mother as the primary beneficiary, but later on you get married. If you didn’t update the beneficiary on your policy, then the proceeds will still go to your mother. 

You can avoid having an outdated life insurance beneficiary by reviewing your policy annually. Talk to your agent with any questions you may have. 

Be specific

In addition to keeping your beneficiaries current, remember to be specific when you name them. If you name “my children” as beneficiaries and one of them dies before you, do you want the other child(ren) to get the entire benefit or the deceased child’s heirs to get their parent’s share? 

Have a back-up

On your policy, the primary beneficiary is the person(s) or entity you select to receive the life insurance proceeds upon your death. However, if your primary beneficiary can’t be located, refuses the proceeds, or is deceased at the time of your death, then a secondary (or contingent) beneficiary becomes the recipient.

Primary and contingent beneficiaries can be equally important, so make sure you follow the same advice for selecting a secondary beneficiary as you would for choosing the primary one. 

Avoid designating a minor

State regulations may limit if or how much a minor child can receive from life insurance proceeds, so the court may have to appoint a guardian to administer the funds. That can be a lengthy process, and one that typically requires multiple court dates.

To avoid this, consider setting up a trust or designating an adult you trust to oversee the distribution of the money to the minor. 

Don’t count on your will to override your beneficiary choices 

Make sure your wishes are honored by having your will match your life insurance policy. If you update your will, take the time to update your life insurance beneficiaries (and vice versa). In the event your will and life insurance beneficiaries do not match, your life insurance beneficiary designations will win out every time.

Remember, life insurance is a contract and will be enforced as it is written.

Don’t unintentionally disqualify your beneficiary from other benefits 

According to the Social Security Administration, a person who is aged, blind or disabled and receives Supplemental Security Income (SSI) and/or Medicaid could potentially have their monetary benefits reduced or suspended if their inheritance increases their income, based on program eligibility. If one of your beneficiaries needs to use these benefits to help their financial situation after your death, consider federal regulations before adding them as a beneficiary.

Be aware of state laws 

Typically, in community property states, your spouse will have to sign a waiver if you designate someone else to be the beneficiary. Check with your independent agent for more details or to ask questions surrounding designating your life insurance beneficiaries in your state. 

What happens if you don’t designate a beneficiary?

If you do not designate any beneficiaries (or all of them predecease you), the life insurance proceeds will be paid to your estate. If that happens, the probate court will decide how to handle the funds. This could take a while and possibly chip away at the proceeds.

So, in order to get the money into the hands of those who need it as soon as possible, designating a specific beneficiary is the way to go.

What Is Life Insurance Beneficiary? All You Need To Know