Who Can Be Your Life Insurance Beneficiary?

Life insurance is a way to provide financial protection for your loved ones after you're gone. When you take out a life insurance policy, you'll be asked to name a beneficiary – the person who will receive the payout, or death benefit, from your policy when you die. While it's not mandatory to name a beneficiary, it's usually the reason people buy life insurance in the first place. Most people name their spouse, partner, or child as the primary beneficiary, but what if you want to list a parent?

Naming a parent as a beneficiary when you have a spouse and/or children

Yes, you can list a parent's name for life insurance beneficiary, but there are a few things to consider if you have a spouse and/or children.

Primary and Contingent Beneficiaries

If you are married and/or have children, your spouse and/or children are typically considered your primary beneficiaries. This means that they are first in line to receive the death benefit from your life insurance policy. In most cases, the primary beneficiary is the person you want to receive the payout from your policy, and in the event of their death, you would want to designate a secondary beneficiary (also known as a "contingent" beneficiary).

Naming Parents as Beneficiaries

If you want to name a parent as a beneficiary, you can do so as a contingent beneficiary. This means that they would receive the death benefit in the event that both you and your primary beneficiary (your spouse and/or children) die at the same time. Without a contingent beneficiary, the payout would likely go to your estate and not directly to someone you would want to have it.

Special Circumstances

It's important to note that in some states, you may be required to list your spouse as your primary beneficiary and designate them to receive a certain percentage of the benefit. In certain cases, you may need your spouse's written permission to name someone else as the primary beneficiary. Additionally, if you are divorced, you may still be required to name your divorced spouse or child as an irrevocable beneficiary.

Minors as Beneficiaries

If you have minor children, you can name them as beneficiaries, but it is not recommended as it can delay the payout. Instead, you can set up a trust for your children and name the trust as the beneficiary. This way, the funds can be managed and distributed according to your directions, and you can ensure that your children receive the benefit promptly without having to pay taxes or legal fees.

In summary, while you can list a parent's name for life insurance beneficiary, it is important to consider your spouse and/or children as primary beneficiaries and any special circumstances that may apply. If you want to name a parent as a beneficiary, you can do so as a contingent beneficiary to ensure that the payout goes to someone you want to have it in the event of simultaneous death.

Naming a trust as a beneficiary

While it is possible to take out a life insurance policy without naming a beneficiary, it is not recommended. If you die without naming a beneficiary, the payout from your policy will automatically become part of your "estate" and will have to go through probate, which is a lengthy and costly legal process. To avoid this, it's best to name a beneficiary.

When choosing a beneficiary, most people opt for a close relative, such as a spouse, sibling, or child. However, in some cases, it may be preferable to name a trust as the beneficiary of your life insurance policy. Here are some things to consider if you're thinking of naming a trust as a beneficiary:

Common Trusts Used as Beneficiaries

There are two types of trusts that can be listed as beneficiaries: irrevocable trusts and revocable trusts. A revocable trust is more commonly chosen, as it offers more flexibility. With a revocable trust, you can take distributions from the trust until you pass away, at which point the assets are transferred to the beneficiaries. A revocable trust can also be modified by the owner, whereas an irrevocable trust cannot.

Tax and Financial Advantages of Trusts

One reason people choose to name a trust as a beneficiary is to minimize the taxes on their life insurance benefits. By naming a trust as the primary beneficiary, you can avoid probate and estate tax, depending on your financial situation. It also gives you more control over how your wealth is used and when it is distributed to your beneficiaries.

How to Create a Trust

Creating a trust can be done through an estate planning attorney or an online service. The cost of setting up a trust can vary, but it is generally a pricey and time-consuming process.

Pros of Listing a Trust as Your Life Insurance Beneficiary

Listing a trust as your life insurance beneficiary offers several advantages. It helps you sidestep probate, which can be expensive and time-consuming. It also gives you control over the cash flow distributed to your beneficiaries, ensuring that the funds are used for your intended purposes.

Cons of Listing a Trust as Your Life Insurance Beneficiary

One of the biggest deterrents to listing a trust as a beneficiary is the cost and time required to set it up. Additionally, creating a trust requires additional estate planning, such as having a will in place. It is important to consult with a financial professional or attorney to ensure that naming a trust as a beneficiary aligns with your unique financial situation and goals.

Naming a custodian for minor children

While it is possible to name a minor child as a beneficiary, it is not recommended. In the event of your death, a minor child cannot receive the death benefit directly. Instead, a court will appoint an adult custodian to manage the funds until the child reaches the age of majority (typically 18, but this varies by state). This process can take several months and delay the financial support you intended for your child.

Therefore, it is better to set up a trust for your child or designate a custodian who can help them claim and manage the death benefit. A custodian is responsible for claiming the death benefit on your child's behalf and will manage the money in their best interest until your child turns 18. When choosing a custodian, consider whether the individual is knowledgeable about finances and has the time to handle the responsibility.

If you are unable to set up a trust or designate a custodian, you can name your spouse as the primary beneficiary and your trust as the contingent beneficiary. Your spouse can continue managing your household finances and set money aside for your child's future.

Choosing a primary beneficiary

• Understand the role of a primary beneficiary: A primary beneficiary is the person or entity you want to receive the payout from your life insurance policy first. They are your first choice and will receive the death benefit if you pass away.
• Identify your loved ones and dependents: Think about your spouse, children, parents, siblings, or other family members who are closest to you and depend on you financially. Consider the impact of the death benefit on their lives and choose the person you want to protect financially after your death.
• Evaluate financial needs and priorities: Consider the financial needs of your loved ones and prioritize those who rely on you the most. This could include anyone who would suffer financially due to your loss, such as a spouse, children, or other dependents.
• Consider the age of potential beneficiaries: If you are considering naming a minor child as your primary beneficiary, be aware that there may be legal restrictions. Minors cannot directly receive the death benefit, so it is usually advisable to choose an adult beneficiary or set up a trust for minor children.
• Assess the insurable interest: The beneficiary you choose must have an "insurable interest" in your life. This means that they would suffer financial or other types of losses if you were to pass away. It could be a spouse, child, parent, or another dependent who relies on you financially.
• Review and compare options: Make a list of potential primary beneficiaries and compare them based on their relationship with you, their financial needs, and how the death benefit would impact their lives. This will help you make an informed decision.
• Consult with professionals: Before finalising your decision, consider consulting a financial advisor, insurance agent, or legal professional. They can provide personalised advice based on your unique circumstances and help you navigate any legal or technical complexities.
• Update your beneficiary regularly: Remember to review and update your primary beneficiary as your life circumstances change. Life events such as marriage, divorce, the birth of a child, or the death of a beneficiary may prompt you to reassess your choice.

Remember, choosing a primary beneficiary is a highly personal decision, and there is no one-size-fits-all approach. Carefully weigh your options and consider seeking professional advice to ensure that your choice aligns with your financial goals and intentions for your loved ones.

Choosing a contingent beneficiary

• Dependents: If you have dependents who would need financial support in your absence, consider choosing a contingent beneficiary who can provide that support and manage any financial responsibilities.
• Adults vs. minors: While you can name a minor as a contingent beneficiary, there are additional steps to take, such as creating a trust or custodial account to manage the funds until they reach adulthood.
• Financial responsibilities: Choose a contingent beneficiary who can take on your financial obligations, such as debts, mortgage, or dependents, if your primary beneficiary is unable to do so.
• Organizations: If you have charitable causes or organisations you care about, consider naming them as contingent beneficiaries. This ensures that your money will go towards a meaningful cause if your primary beneficiary is unavailable.

You can name any person, organisation, or business as your contingent beneficiary, giving you flexibility in your decision. It is also important to note that you can have multiple contingent beneficiaries and divide your estate among them.

Frequently asked questions