Ways to Divide a Life Insurance Payout Among Beneficiaries

There are several ways to designate beneficiaries, ensuring that money goes where you want it to.
Apr 6, 2016
Ways to Divide a Life Insurance Payout Among Beneficiaries

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The decision to buy life insurance stems from one desire: to provide a financial cushion for certain people. So understanding the wonky terminology commonly used for beneficiary designations is important.

You can name more than one person to receive the proceeds of your life insurance policy and designate the portion each will receive when you die. For example, many parents of adult children name all of the kids to get equal shares.

But what happens if one of the beneficiaries dies before you do? This is one of the questions you’ll need to consider when buying life insurance.

Two approaches: Per capita vs. per stirpes

You can always update your beneficiaries at any time. Financial experts, in fact, advise people to review their beneficiary designations periodically and make any necessary changes after major life events, such as marriage or divorce. This simply requires filling out a form and submitting it to the insurance company.

You can also designate ahead of time how the money will flow in case one of your primary beneficiaries dies before you do.

There are two main ways to control how life insurance money is distributed if you outlive one of your beneficiaries:

  • Per capita is by person.

  • Per stirpes is by branch of the family.

You can indicate the approach you want to use on a life insurance policy when you fill out the beneficiary designation form. Here’s how the two approaches would work.

Say, for instance, your four children, a son and three daughters, are equal beneficiaries on your policy. If all of them are alive when you die, each will receive 25% of the life insurance payout. However, say you outlive your son, who has two children of his own. Here’s how it would play out:

  • Per capita: Your three daughters will each get their 25% plus equal shares of the money that would have gone to your son.

  • Per stirpes: Your three daughters will each get their 25%. Your late son’s share will be divided between his two children.

The right choice depends on your family situation. Most people want the money to be divided per stirpes when grandchildren are involved, says Scott Malin, an estate-planning attorney and partner at Lathrop & Gage LLP in St. Louis.

Beneficiary forms vary among life insurance companies, so read the form carefully. Typically, the benefit is divided per capita by default among the living primary beneficiaries, and you have to indicate “per stirpes” if you want money distributed to the children of a beneficiary who has died.

These terms are also used for wills, trusts and other financial accounts on which you name beneficiaries, Malin says.

Another option: A life insurance trust

You don’t have to name specific people as your life insurance beneficiaries. You could designate that the payout go to a trust that you’ve set up for your heirs. The trust document, which an estate-planning attorney can help you create, spells out how the assets are to be divided and managed, and a trustee — someone you appoint — oversees the trust. Ask your attorney how to word the beneficiary designation on the life insurance form to direct the payout into the trust.

If you have young kids and you want them to benefit from life insurance money, it’s a good idea to set up a life insurance trust for minor children. If you die while the kids are still minors, the life insurance company can’t pay out the benefits until the court appoints a guardian, which can take time and money. A trust can also provide some financial protection for adult children against creditors or in case of divorce, Malin says.

Many people don’t think they’re wealthy enough to set up a trust. “But if they’ve got $1 million or $2 million in term life insurance, that may change the decision,” he says.

As you think about how your life insurance money should be distributed, make sure you have adequate coverage to protect the people who depend on you financially. NerdWallet’s life insurance comparison tool can help you get started comparing life insurance quotes.

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