Life Insurance Beneficiary: A Complete Guide
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What is a life insurance beneficiary?
Your life insurance beneficiary receives 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. Before putting pen to paper, read the fine print and become familiar with how your life insurance company handles beneficiaries.
Who can be a life insurance beneficiary?
Almost anyone can be a life insurance beneficiary, including people, organizations and trusts. Here are some common examples of life insurance beneficiaries:
A person, like your spouse.
Multiple people, like your children.
A charitable organization.
A legal entity, like your company.
Some insurers place limits on how many beneficiaries you can name. If your policy has a limit, be selective when compiling your list.
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").
Primary vs. contingent beneficiary
Primary life insurance beneficiaries are the first in line to receive the death benefit if you die.
Contingent life insurance beneficiaries, sometimes called secondary beneficiaries, receive the death benefit if the primary beneficiary dies before you do.
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.
Choosing a life insurance beneficiary
This decision isn't always a simple one. The right choice may not be the most obvious choice. Start by asking yourself why you have life insurance in the first place:
Who relies on you financially and would need help paying ongoing bills if you die?
Who would need financial support to cover costs incurred by 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?
You can avoid simple mistakes when designating a life insurance beneficiary by being as specific as you can. If you write “spouse” or “child,” the insurer might not be certain who should receive the funds, especially if you remarry or have multiple children.
Make 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 the insurer can locate your beneficiaries quickly. Consult with a legal professional to ensure you use the correct language.
Once you narrow down your options, ask yourself how much money each beneficiary would need, and divide the death benefit accordingly.
Naming 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, the payout can be complicated.
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 before proceeding.
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.
Naming your estate as your beneficiary
Although life insurance proceeds typically aren't taxable, the payout may be subject to estate tax if left 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, delaying the payout and costing your estate money. If you name a specific beneficiary on your life insurance policy instead, the funds 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 all of the estate tax and inheritance implications before selecting it as a beneficiary.
What happens if you don’t name a beneficiary?
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 automatically be entitled to a percentage of the death benefit. To keep this from happening, 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. Three other states — Alaska, South Dakota and Tennessee — have elective community property laws, which means married couples can choose to have equal ownership of their joint property. As such, if you chose to adhere to community property laws when you got married, your spouse must give consent to beneficiaries named on your life insurance policy.
Changing, adding and removing beneficiaries
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 to ensure the right people are protected. Here are some situations that might prompt you to review your previous selections:
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 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.