Life Insurance Beneficiary: A Complete Guide

It isn't always a simple decision, so here's how to select the right beneficiary for your life insurance policy. 
Georgia RoseSep 4, 2020

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Your life insurance beneficiary receives the death benefit if you die while the policy is still active. 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.

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

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

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.

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

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 , the percentages must add up to 100%. If you don’t list the percentages, the insurer may grant equal shares to each beneficiary.

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 guarantee the death benefit reaches a specific person, such as your child.

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.

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:

You can avoid simple 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 your children as life insurance beneficiaries might seem like a sensible decision. But if you die while they’re still minors, they might not receive the funds until they reach the “age of majority,” usually 18. 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 issue and ensure your children have access to the death benefit without waiting to reach the age of majority:

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.

Trusts can be effective solutions for leaving money to children. You can 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.

Although , 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 and inheritance implications before selecting it as a beneficiary.

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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.

Your life insurance payout may 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 assets. 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.

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.

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:

Encourage your beneficiaries to learn 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 to help beneficiaries find unclaimed policies.

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