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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.
What is a life insurance beneficiary?
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.
Who can be a life insurance beneficiary?
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:
👤 A person, like your spouse.
A common approach is to name your spouse or partner as a beneficiary. Keep in mind some states that have community property laws may require you to assign a spouse as your life insurance beneficiary.
👤👤👤 Multiple people, like your children.
When you specify multiple people should receive your life insurance payout, you’ll be asked what percentage goes to each person. You don’t need to divide the payout evenly.
📑 A trust.
Naming a trust as your life insurance beneficiary is helpful if you’d like your payout to go to a child who is still a minor.
🏛️ Your estate.
If you choose to name your estate as the beneficiary, just know the life insurance proceeds may be held up in probate.
🤝 A charitable organization.
You can choose a charity to receive a part or all of your life insurance death benefit.
💼 A legal entity, like your business.
Providing a payout for a business could help a partner retain ownership upon your death.
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.
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Types of life insurance beneficiaries
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.
Did you know...
If you name multiple beneficiaries, you'll need to choose how much of the payout each party receives. For example, let’s say you name your spouse, child and a local charity as primary beneficiaries. You could allocate 50% to your spouse, 30% to your child and 20% to the charity. No matter how you divide a life insurance payout, 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 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.
How to choose a life insurance beneficiary
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.
🤓 Nerdy Tip
You can avoid any claim delays by providing as much information as possible about your beneficiaries upfront. Include identifying factors such as each beneficiary’s full name, Social Security Number, relationship to you, date of birth and address. This helps your insurer locate beneficiaries quickly. Consult a legal professional to make sure you use the correct language. 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.
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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 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.
Did you know...
Five other states — Alaska, Florida, Kentucky, South Dakota and Tennessee — have elective community property laws. This means married couples can choose to have equal ownership of joint property. If you chose to use community property laws when you got married, your spouse must give consent to the beneficiaries named on your life insurance policy.
How to change a life insurance beneficiary
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.
Frequently Asked Questions
How much do beneficiaries get from life insurance after death?
The amount of your life insurance payout is based on a few things, primarily the type of life insurance you have, the face amount or death benefit amount of your policy, and any riders or policy add-ons that were in effect. If you have permanent life insurance, the payout may also be affected by any withdrawals or loans that were made against the cash value of the policy.
What happens when a life insurance beneficiary is deceased?
If the primary beneficiary of a life insurance policy has died, the payout of the policy would go to any contingent beneficiaries. If there are no contingent beneficiaries, the life insurance proceeds would be paid to the insured person’s estate.
Do life insurance companies contact beneficiaries?
Typically, no. Life insurers have no obligation to reach out to your beneficiaries to let them know they’re owed a payout. It’s important to tell your beneficiaries they’re listed on your policy so they can file a life insurance claim and get the money you intended to leave them.
How is life insurance paid out to beneficiaries?
In most cases, life insurers pay a lump sum to beneficiaries. Some insurers can pay out the death benefit in installments — if you’re a beneficiary who’s interested in this payment structure, speak to the insurer when you make a claim.
Where do I search to find out if I’m a life insurance beneficiary?
The National Association of Insurance Commissioners has a form you can fill out to check their database of unclaimed policies. You can also visit the insured’s state insurance website to see if they have a policy locator or a form you can fill out to request more information.
