Choosing a Life Insurance Beneficiary

Naming a life insurance beneficiary should be an easy and uncomplicated process. While it can be straightforward in many cases, many potential legal, financial, and tax-related problems can occur if you don’t name your beneficiaries properly. Therefore, it’s important to discover how to avoid making simple but potentially costly mistakes.

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What Is a Life Insurance Beneficiary?

So, what is a life insurance beneficiary? A beneficiary for life insurance basically refers to the person who is designated to receive the death benefit payouts when the policyholder dies. You can designate a primary beneficiary, who can be any number of people or organizations assigned to receive your policy's death benefits. 

If you have multiple primary beneficiaries, they can each be assigned a certain percentage of the death benefits they'll receive after you pass. Contingent beneficiaries are assigned in case the primary beneficiary dies before they can receive the death benefits from your policy. These beneficiaries also can receive the death benefit payout if, after you pass, the primary beneficiary cannot be located.

What’s the Difference Between a Primary and Contingent Life Insurance Beneficiary?

How do you designate a life insurance beneficiary legally? There are two basic types of life insurance beneficiaries:

1. Primary beneficiary: The primary beneficiary is the person or people who will receive the proceeds of the life insurance policy when the insured person dies. However, the primary beneficiary will not receive any proceeds if they die before the death of the named insured.
2. Contingent beneficiary: This is also known as the secondary beneficiary. The contingent beneficiary will not receive any of the life insurance proceeds if the primary beneficiary is still alive when the insured person dies. The contingent beneficiary is only entitled to receive proceeds if the primary beneficiary dies before the named insured.

Many professionals in the industry feel that the best or safest approach is to name an individual for each beneficiary type. That way, you will have both a primary and contingent beneficiary on your life insurance policy.

What’s the Difference Between a Revocable and Irrevocable Life Insurance Beneficiary?

There are two classes of beneficiaries, known as revocable and irrevocable beneficiaries.

1. Revocable beneficiaries: The owner of the life insurance policy has the right to change the beneficiary designation at any time without the consent of the previously named beneficiary.
2. Irrevocable beneficiaries: The owner of the life insurance policy cannot change the designation of the beneficiary without the consent of the original beneficiary.

Which is the better choice? Most experts consider the simplest way to go is with a revocable beneficiary option. There are a number of potentially complicated legal issues that can occur if you opt to go with an irrevocable beneficiary.

What to Consider Before Choosing a Life Insurance Beneficiary

There are various things to consider before choosing a life insurance beneficiary. In some states, known as community property states, life insurance is owned by both spouses if it was purchased while they were married. 

The surviving spouse would, therefore, be entitled to half of the death benefit proceeds, regardless of who the named beneficiary is. There are nine community property states:

When choosing your life insurance beneficiary, also consider the person's age. There are certain life insurance beneficiary rules to be aware of, some of which concern age. 

For minors, often, a guardian should be named on your policy to manage the beneficiary's money until the minor reaches a legal age to receive the death benefit payout. Also, consider that a beneficiary who is legally disabled may need to have a special needs trust established in order to receive the death benefit payout without losing any of their government assistance.

Another key factor to consider when choosing your life insurance beneficiary is how you might want to split your death benefit payout among your children. If you've remarried and have children from a previous marriage, how might you want your life insurance proceeds to be divided between them? 

Further, will you be leaving any of your death benefit payouts to your current spouse? In these cases, you might need to assign multiple primary beneficiaries to your policy. A financial advisor or your independent insurance agent can also help advise you on carefully selecting your life insurance beneficiary or beneficiaries. 

Choosing a Life Insurance Beneficiary

How do you choose who should be your life insurance beneficiary? You should consider:

• Family: One or more immediate family members who are dependent on you for both your income and financial support likely might top your list of potential beneficiaries. Your primary and contingent family beneficiaries can include your spouse or domestic partner, children, brothers and sisters, parents, or any other family member. It's up to you to decide on the order of importance.
• Legal guardian: If your named beneficiaries are minors (i.e., under the age of legal consent), the life insurance company may require that you name a legal guardian as the beneficiary. Alternatively, you can designate a legal guardian using the Uniform Transfers to Minors Act on their behalf instead of using a legal guardian. Note that even if you have named a guardian as the beneficiary, the proceeds will not be paid until the court has specifically appointed a guardian or approved the named beneficiary as a guardian for the minor(s).
• Estate: You can choose your estate as beneficiary. The insurance proceeds will be directed according to the terms of your will. If, however, you don’t have a will, the courts will determine who receives the proceeds based on state law. Be sure to discuss the tax implications of naming your estate as a beneficiary with your accountant, financial advisor, or independent insurance agent.
• Trusts: A trust must be set up before you can designate one or more trustees and name the trust as a beneficiary.
• Charity: You can name a charity as either the primary or contingent beneficiary.
• Key person life insurance: It is a common practice for a business to purchase life insurance for key personnel in the company. The company may own this form of life insurance, in which case the business is typically the beneficiary of any applicable life insurance policies. Or the business owner may buy a life insurance policy and name a co-owner as beneficiary, enabling the co-owner to purchase the policyholder's share of the business if the policyholder dies.

How to Name a Beneficiary on Your Life Insurance Policy

The beneficiary of life insurance must be formally named on your policy. There are certain details you'll be required to know about the person or people you'll be naming as your life insurance beneficiary, including their full legal name, full address, phone number, Social Security number, and date of birth. 

You can assign your beneficiary or beneficiaries a specific percentage of your death benefit payout or state in your policy that you'd like the death benefit to be assigned as "per stirpes" or "per capita." Per stirpes indicates that you've chosen for your death benefit to be divided equally across each branch of your family, while per capita indicates that you want your death benefit to be divided equally among each named beneficiary. 

It's also up to you to dictate whether you want your beneficiary to receive your death benefit payout in monthly installments or as one lump sum payment. If your beneficiary is younger, such as a teenage child, you might opt for the monthly installment payment option. This can help ensure your child will manage the money more wisely.

How to Change the Beneficiary on Your Life Insurance

Remember that you are not required to keep the same beneficiary on your life insurance policy forever. There are a number of reasons you may want to change beneficiaries, such as:

• Marriage or divorce
• The birth of a child
• The death of a named beneficiary
• A personal conflict with a named beneficiary

In most cases, the policy owner is the only person who can change the beneficiary on a life insurance policy. If someone else has power of attorney over you, they may make the change on your behalf. If you have named irrevocable beneficiaries, you will need to obtain approval before making any changes.

To change life insurance beneficiaries, contact your life insurance provider. They will provide you with a change of beneficiary form to complete. You will need to provide the full names of each requested beneficiary as well as their Social Security numbers.

What If You Want to Name Multiple Beneficiaries?

If you want to name more than one life insurance beneficiary, there are two approaches you can take:

• Per stirpes: You can designate your beneficiaries by “branches of the family or lineage.” This means that the life insurance proceeds would be passed down to be divided equally among the beneficiaries and/or the surviving children of the beneficiaries.
  Example: You, as the insured, designated your son (John) and daughter (Jane) as beneficiaries. Your son John dies before you do. If you were to pass away next, then Jane would receive 50% of the proceeds, and the remaining 50% would then be apportioned equally to all of John’s surviving children.
• Per capita: Simply put, the proceeds are divided equally among all the beneficiary survivors of the lineage line.
  Example: Using the above scenario, suppose John had four children, and Jane had no children when you, as the insured, passed away. This means the proceeds would be divided equally between John’s four children and Jane. Since there are a total of five beneficiary survivors, each beneficiary would get one-fifth of the life insurance proceeds.

If you have multiple beneficiaries, it is best to designate that proceeds will be distributed as a percentage rather than a dollar amount. Why? You might buy a $100,000 universal life insurance policy and apportion $50,000 to your two children as beneficiaries. But, when you pass away, the policy could be worth $120,000, and the insurance company would have no instructions on how to divide up the remaining $20,000 legally. An unfortunate and avoidable legal battle could ensue for the remaining portion of your policy.

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The Dos and Don’ts of Naming a Beneficiary

Here are some things you should do and some things you must consider when naming a beneficiary:

• DO: Identify the primary beneficiary. This should include their full name(s), date(s) of birth, and Social Security number(s).
• DO: Designate percentages rather than specific dollar amounts.
• DO: Include a secondary or contingent beneficiary in your policy.
• DO: Revisit your life insurance policies every few years to ensure the beneficiary designations are current.
• DO: Amend your life insurance policy if your circumstances change, for example, in the event of a new addition to the family, the death of a beneficiary, or divorce.
• DO: Review your beneficiary designations with your insurance professional.
• DON’T: Name a beneficiary generically such as "wife," "spouse," or "children." If you file for divorce and do not specifically name a designated beneficiary, there's likely to be a legal battle for the benefits of your policy. Likewise, in the event that a family member becomes disenfranchised for any reason, you'll want to ensure that your beneficiaries are specifically named.
• DON’T: Use “estate” as beneficiary when you have specific family members that you want to receive the proceeds. If you name your estate as beneficiary, the proceeds will become entangled in the estate probate and could cause potential tax issues. Your creditors will also be able to place their claims against the estate proceeds. Named beneficiaries get the proceeds of a life insurance death benefit directly.
• DON’T: Name minors unless you have a designated guardian for them.

What Happens If You Don’t Have a Life Insurance Beneficiary?

If no life insurance beneficiary is named on your policy, the death benefit still has to go somewhere. The death benefit payout will likely be made to your estate if no beneficiary was named on the policy. A potentially lengthy legal probate process can ensue in such a case, delaying any heirs from receiving the proceeds. 

Further, if the beneficiary of life insurance becomes your estate by default, the death benefit might be used to cover the settlement cost of your estate, as well as any outstanding debts you have, which can greatly limit any possible amount of proceeds that could be inherited by family, etc.

When Your Beneficiary Dies Before You and Other Concerns

If your beneficiary dies before you do, you should rename the beneficiary on the policy as soon as possible. As previously mentioned, all you have to do is contact the life insurance company and request a change of beneficiary form. If both the insured and beneficiary died at the same time, then the proceeds would go to the insured’s estate.

How Beneficiaries Claim a Life Insurance Policy

There's a process involved when the life insurance beneficiary wants to claim a life insurance policy and the proceeds they're entitled to. First, the beneficiary of the life insurance policy must know certain details about the person and the policy being claimed. The beneficiary will be required to present a valid death certificate, the life insurance policy or a copy of it, a claim form from the insurer, and the primary beneficiary's death certificate (in the case of a contingent beneficiary). 

After the life insurance claim gets submitted, the carrier must review it and then pay out the death benefit if the claim is approved. After a few days to several weeks, the named beneficiary or beneficiaries can receive the life insurance proceeds. 

Final Considerations about Life Insurance Beneficiaries

Naming a beneficiary requires careful consideration. If you don't put some thought into how you name your beneficiaries, your family and estate may face legal or tax complications. Always keep your beneficiary information current on all your life insurance policies.

An independent insurance agent can help you find the best life insurance policy available in your area. They can shop and compare plans from multiple carriers to help you find the right blend of coverage and cost. Your agent can also help answer any remaining life insurance questions you may have, as well as help evaluate your personal needs so you get the proper amount of coverage.