Life Insurance Beneficiary: A Complete Guide

One of the main reasons to buy life insurance is to support someone financially after you die. However, figuring out the best way to divide up your policy payout may not be as straightforward as it seems.

Because naming beneficiaries is part of the process of buying life insurance, you should figure out who you want to receive the money from your policy before you sign on the dotted line.

Your life insurance beneficiary receives your policy’s payout — known as the death benefit — if you die while the policy is still in force. Choosing your beneficiary is an important step in owning a life insurance policy since 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. Some state laws and policy rules can influence or even restrict your choices. Before you purchase a policy, read the fine print and become familiar with how your life insurance company handles beneficiaries.

Almost anyone can be a life insurance beneficiary, including people, organizations and trusts.

Most insurers will simply ask you to list your relationship with the beneficiary when you fill out the form (for example, "spouse," "friend" or "domestic partner"), without needing to prove that beneficiary has a financial interest in your life

Here are some examples of life insurance beneficiaries:

Some insurers place limits on how many beneficiaries you can name. If your policy has a limit, you’ll have to be selective about your choices when compiling your list.

Some of the terms insurers use on life insurance forms can be confusing, especially those that refer to different kinds of beneficiaries. Here are the terms you'll see and what each means.

Primary vs. contingent beneficiary

Primary life insurance beneficiaries are the first in line to receive the life insurance death benefit if you die.

Contingent life insurance beneficiaries, sometimes called secondary beneficiaries, receive the payout if the primary beneficiary dies before you do.

Irrevocable vs. revocable beneficiaries

You cannot change an irrevocable life insurance beneficiary without the beneficiary’s approval. For this reason, irrevocable beneficiaries 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 business situations, such as to guarantee repayment of a loan.

In contrast, a revocable life insurance beneficiary is flexible. You can change, update, add or remove a revocable beneficiary at any time to meet your current needs. This is a more popular approach when naming beneficiaries.

Start by asking yourself why you have life insurance in the first place:

• Who relies on you financially and would need help paying bills if you die?

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

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

It’s a good idea to focus on people who would face financial burden if you were to die unexpectedly. In most cases, you can update beneficiaries as many times as you like while the policy is active.

How to name your children as your beneficiaries

Naming your children as life insurance beneficiaries might seem like a sensible decision. But if you die while they’re still minors, they won’t directly get the payout .

These are your options:

Appoint a guardian

Many states allow legal guardians to receive payouts on behalf of minors. You can appoint a legal guardian prior to your death, or the guardian can petition for rights after you die. In either case, the state must grant the guardian legal rights to manage the child’s finances. Appointing a guardian can be a lengthy and expensive process, so consult with a lawyer.

Establish a trust

Trusts can be effective solutions for leaving money to children. You can set up a life insurance trust for your children and have the trustee oversee 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.

How to name your estate as your beneficiary

Although life insurance proceeds typically aren't taxable, the payout may be subject to estate tax as part of a large inheritance.

Even if you have a will, your estate — including the death benefit — can get held up in probate court. This could delay the payout and cost your estate money. If you name a specific beneficiary on your life insurance policy instead, the funds will go directly to the beneficiary without being wrapped up in your estate.

Naming your estate isn't necessarily the wrong move, but make sure you consider estate tax and inheritance rules before selecting it as a beneficiary.

» MORE: What is probate— and how to avoid it

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

Community property states

If you live in a community state and used money earned during your marriage to pay your life insurance premiums, your spouse may be entitled to a percentage of the death benefit. To waive this right, your spouse must give written consent to the named beneficiary before you die. States with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

You can typically change, add or remove revocable life insurance beneficiaries at any time. The methods to do so vary among insurers. Some companies may require a change of beneficiary 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 reassess your life insurance beneficiaries after major life changes so the right people are protected. Here are some situations that should prompt you to review your beneficiaries:

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

• You get divorced and want to remove your ex-spouse from the policy and name a child, trust or close family member instead.

• You have children and want to add them to your list of beneficiaries.

• Your kids no longer rely on you financially and you want to adjust their percentages or assign a spouse instead.

• Your beneficiary dies or turns 18 and you want to change or edit your choice.

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

» MORE: How to find out if someone had life insurance