What Is A Life Insurance Beneficiary? (2024)

Americans buy life insurance for a variety of reasons. Perhaps to pay off a mortgage, provide an income for a spouse or fund future college expenses. Or it could be merely to pay for a funeral and final expenses.

Regardless of your motivation for buying life insurance, it’s crucial to name a life insurance beneficiary.

What Is a Life Insurance Beneficiary?

A life insurance beneficiary is a person or entity you select to receive the death benefit from your life insurance policy when you pass away.

The beneficiary is paid the death benefit. A life insurance policy is a contract between you and the life insurance company, and the insurer is obligated to follow the contract. That means the payout goes to the beneficiaries named on the policy regardless of what your will or family say.

You can choose more than one beneficiary, and you can choose how much of the death benefit goes to each person.

Life insurance payouts can also be used to keep businesses, especially family businesses, afloat.

Primary vs. Contingent Beneficiaries

A primary beneficiary receives the death benefit when the policyholder dies, but what happens if the primary beneficiary has already passed away? That’s when you need a contingent beneficiary, sometimes called the secondary beneficiary.

You can have one or more primary beneficiaries and one or more contingent beneficiaries. Here are the differences:

• Primary beneficiary: Receives the death benefit when the insured person dies.
• Contingent beneficiary: Receives the death benefit only if the primary beneficiary has already passed away.

The policy’s death benefit goes to the insured person’s estate if all the primary and contingent beneficiaries have died.

Who Can Be a Life Insurance Beneficiary?

You can name anyone as a life insurance policy beneficiary. You can name family members, friends, charitable organizations, children or the guardians of your children. Trusts can also be named as beneficiaries.

Some state laws may require you to name your spouse as your primary beneficiary, getting at least 50% of the benefit. In some states, you may be able to name someone other than your spouse as a beneficiary if you have documented permission from your spouse to do so.

The nine community property states that say a spouse has a right to 50% of a life insurance death benefit are:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

How Do I Choose a Life Insurance Beneficiary?

Naming a life insurance beneficiary is an important way to provide funds for those who will need financial support when you pass away. This is often a spouse or adult children.

Designating a Beneficiary

There are two options when designating a beneficiary.

• Revocable beneficiary: You can change who you want as beneficiary at any time during the life of your policy with a revocable beneficiary.
• Irrevocable beneficiary: An irrevocable beneficiary can’t be removed from your policy or have their share of the death benefit changed without their consent. An irrevocable beneficiary must also be notified if you cancel the policy.

Deciding How the Death Benefit Will Be Paid

There are also options when choosing how the death benefit will be paid to beneficiaries.

• Per capita (by “head”): The amount is split equally among all beneficiaries, often among children.
• Per stirpes (by “branches”): This means that if a child predeceases the policyholder, his or her children—the branches—receive what would otherwise be shared among the living children. Per stirpes is a valuable tool for protecting grandchildren, particularly if they’ve lost a parent.

Setting Up a Trust

When it comes to protecting grandchildren—or even that pair of beagles who were your best friends during your later years—nothing works as well as setting up a trust for all, or at least some, of the money from your policy. With a trust, the life insurance proceeds automatically go into the trust and can be distributed according to the trust’s rules.

If you decide to set up a trust, it’s critical to find good trustees.

You might want to ensure that a young beneficiary doesn’t squander their inheritance on a Lamborghini and forget about college. You may also want to guarantee that a favorite charity receives the money needed to help end world hunger or just prevent the dogs from being taken to the pound.

A trust is a way to accomplish this. In a sense, it keeps your hand on the tiller of your financial ship even after you’re gone. An attorney can help you make a trust as part of an estate plan.

Think of it as one of the notable times in your life when you—and only you—get to decide what is the right choice. After all, this is a personal decision and you can do as you please.

Life insurance is a legal contract that can seldom be challenged, except under very special circ*mstances, and is even less likely to be overturned in court than a will. You may offend someone—or several people—with your choice of beneficiary, but what can they do about it? The truth is, unless you tell them ahead of time, they probably won’t find out they’re not your life insurance beneficiaries until you’re dead.

When to Update, Change, Add or Remove Beneficiaries

It’s a good idea to review your life insurance beneficiaries at least once a year to make sure you’re still comfortable with who you have listed. Divorce, marriage or the death of a loved one are all instances that may cause you to reconsider your beneficiaries.

While a life insurance policy is a contract, it’s important to remember that it’s not set in stone. It’s a living document—at least while the policyholder is alive—and its beneficiaries can usually be changed at any time with either a request form or online.

Your likes and dislikes can lead to change. For example, one child may step up to help during an illness or injury while another sits on the bench. Divorce and remarriage can also lead to change, particularly if there are new children to consider.

If you and your spouse are ending your marriage, it’s prudent to know how life insurance works during a divorce. A settlement might include a stipulation that one or both spouses maintain life insurance, especially if they’re going to owe alimony or child support.

Since your life can constantly change, and people can come and go, insurers recommend naming contingent beneficiaries. These are people or entities like charities that would receive the money if the primary beneficiary has died. This is something that should always be considered, especially if your spouse is a primary beneficiary and you are growing old together.

Life Insurance Beneficiary Frequently Asked Questions