Who Can Be My Life Insurance Beneficiary?

When taking out a life insurance policy, you are required to name a beneficiary or multiple beneficiaries who will receive the payout, also known as the death benefit, in the event of your death. While you can choose anyone as your beneficiary, there are some restrictions. The person you choose must have insurable interest, meaning that they could suffer financially if you were to die. This could be a close relative, such as a spouse, child, or parent, or a more distant relative or friend. You can also name a charity or trust as your beneficiary.

In some states, you may be required to list your spouse as your primary beneficiary, and they must consent if you choose to name someone else. It's important to keep your beneficiary designations up to date, as your life changes, and to be specific with names to prevent confusion and speed up the payout process.

Naming a minor as a beneficiary

While it is possible to name a minor as a beneficiary, it is not recommended. Due to legal restrictions, minors cannot be paid the death benefit directly. Instead, the probate court will appoint a guardian to oversee the distribution of the funds, which can be a lengthy and costly process.

If you want your life insurance payout to go to your minor child, it is better to set up a trust in their name. This way, they will receive the benefit promptly and without having to pay taxes or legal fees. Alternatively, you can name a custodian to claim and manage the death benefit on their behalf until they turn 18. This could be the child's other parent, or a trusted family member or friend.

Choosing a charity as a beneficiary

If you want to leave money to a charity when you die, you can name it as a beneficiary of your life insurance policy. This is a simple way to make a charitable donation, and it's possible to name multiple beneficiaries and contingent beneficiaries.

There are a few things to keep in mind when choosing a charity as a beneficiary:

• Identify the causes you want to support: There are many charities doing wonderful things, so it's important to choose an organization that aligns with your values and that you believe will make the most impact with your donation.
• Reach out to the charity in advance: Contacting the charity can help ensure that the gift is planned correctly and that your donation is used as you intend. It can also make things easier for your loved ones later on.
• Consider the tax implications: There is no federal or state tax benefit for naming a charity as the beneficiary of a term life insurance policy, and you cannot write off your premium payments as an income tax deduction. However, if you donate the proceeds of a permanent life insurance policy, you may have more tax strategies available to you. Consult a financial professional or tax advisor before making any decisions.
• Understand the different types of life insurance policies: A term life insurance policy is only in force for a certain number of years, so it may not be ideal for charitable giving. A permanent life insurance policy, on the other hand, stays in force throughout your life as long as you continue to pay premiums.

Contingent beneficiaries

A contingent beneficiary is a backup beneficiary who will receive the benefit of your life insurance policy if the primary beneficiary cannot receive the payout. When applying for a life insurance policy, you will be asked to name your primary beneficiary, who will be first in line to receive the death benefit. However, if the primary beneficiary has died, cannot be located, or refuses the payout, the contingent beneficiary will be entitled to the benefit.

You can name multiple contingent beneficiaries, and they can be any person, organisation, estate, charity, or trust. Each beneficiary can be designated a specific percentage of the money, adding up to 100% in total. For example, if you name your spouse as the primary beneficiary and your children as contingent beneficiaries, and your spouse is unable to collect the death benefit, your children will each receive a portion of it.

While not always required, it is a good idea to name at least one contingent beneficiary in your life insurance policy. This helps ensure that your assets go to someone you care about and prevents them from being subject to estate taxes or the probate process. It is important to review and update your beneficiaries after major life changes such as marriage, divorce, or the death of a loved one.

Primary beneficiaries

A primary beneficiary is the person or people who are first in line to receive the death benefit from your life insurance policy. Typically, this is your spouse, but it can also be your children, other family members, or a friend. You can name multiple primary beneficiaries, and you must decide how you want the money to be split between them. This is usually done by percentage, and the percentages must add up to 100%.

It's important to keep your primary beneficiary designations up to date, especially after major life changes such as marriage, divorce, or the birth of a child. If you don't name a primary beneficiary, the death benefit will typically go to your estate, which can delay the payout and make the funds accessible to debt collectors.

When choosing a primary beneficiary, you should consider who relies on you financially and would need financial support to cover costs incurred by your death, such as funeral expenses. You can also leave money to a charity or a trust for your children.

Revocable vs. irrevocable beneficiaries

When choosing a beneficiary for your life insurance policy, you have the option to make them revocable or irrevocable. But what does that mean?

Revocable Beneficiaries

A revocable beneficiary is someone you choose that can be changed at any time without their permission. If all your beneficiaries are revocable, you can freely modify or cancel your life insurance policy because no one else's permission is required.

This flexibility is helpful in situations where family dynamics change over time. For example, suppose you select your two adult children to each receive 50% of your death benefit. They're both revocable beneficiaries. As the years go by, Child One visits you frequently and takes responsibility for your care, while Child Two rarely comes to see you. In this scenario, you might want to change your death benefit to provide Child One with a larger payout. However, if both children were irrevocable beneficiaries, Child Two might object to this change and not provide their consent. Keeping your beneficiaries revocable keeps you in full control of who gets the payout.

Irrevocable Beneficiaries

An irrevocable beneficiary is a beneficiary that must consent to any changes you request on your life insurance policy. Ultimately, irrevocable beneficiaries have a more substantial right to your death benefit because you can't alter or cancel your life insurance without their permission.

Irrevocable beneficiary status ensures money goes to where you originally planned. It's commonly used in divorce settlements or separation agreements, where each spouse lists their ex as an irrevocable beneficiary. Suppose after a divorce, one spouse passes away. Their death means the other spouse no longer receives spousal or child aid payments for their dependent children. However, life insurance funds provide financial protection by making up for this loss. An irrevocable beneficiary designation prevents a former spouse from changing the policy's designation without the other person's knowledge.

How to Choose

Policies generally default your beneficiaries to revocable, but there are particular reasons to make someone an irrevocable beneficiary. When doing estate planning with your life insurance plan, it's usually wise to make contingent beneficiaries revocable. This removes the burden of gathering numerous consents whenever you want to change your life insurance.

Even primary beneficiaries can be revocable. Doing so lets you remain in control of your life insurance policy. As life changes, your priorities change as well. Accommodating these priorities is much more complex when you need one or multiple irrevocable beneficiaries to consent to policy changes.

Frequently asked questions