Life Insurance Beneficiary: Surviving Spouse's Entitlement Explained

Life insurance is an important part of financial planning as it helps your loved ones maintain their quality of life after your death. A life insurance beneficiary is the person or persons you name to receive the death benefit of your life insurance policy. While there is no requirement that a spouse be automatically named as the beneficiary of a life insurance policy, most of the time, a spouse is the primary beneficiary. However, in community property states, the policyholder's spouse is automatically considered the beneficiary. The death benefit from the life insurance policy can serve as a crucial source of income replacement, debt repayment, and overall financial stability for the surviving spouse, helping them navigate challenges that arise after losing their partner.

Community property states and spousal rights

Community property states have laws that dictate that property acquired during a marriage is owned equally by both spouses. This means that when a couple divorces, all assets purchased or earned during the marriage are split equally between the two parties. This is because the law views ownership of these policies as 50/50. There are nine community property states in the US: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

In community property states, life insurance policies might be considered community property. This means that if a spouse purchases term life insurance coverage, the other spouse is generally the beneficiary unless another beneficiary is specified. If there is a beneficiary other than the spouse, the spouse cannot override this, but they are usually entitled to half of the death benefit. This is because the law splits community property in half. As a result, half of the benefits go to the spouse, and half go to the listed beneficiary.

However, there are exceptions to community property laws. Life insurance policies issued by federal agencies, such as the Federal Employees' Group Life Insurance (FEGLI) Program, do not allow for the benefit to be split between the beneficiary and the spouse in community property states. In these cases, the beneficiaries named are the ones who receive the life insurance death benefits, overriding state laws.

In some community property states, such as Alaska, Florida, Kentucky, South Dakota, and Tennessee, spouses can opt in to community property laws. This means that they can choose to have certain assets or income acquired during the marriage considered as community property. To do this, spouses may need to create a community property agreement or trust, which outlines that all or some property and income are considered community property.

It is important to note that separate property, such as assets owned by one spouse before the marriage or gifts and inheritances received during the marriage, is not considered community property and is not subject to the same laws.

Naming multiple beneficiaries

There are two aspects of beneficiary designation:

• You can list a primary beneficiary who will receive 100% of the proceeds and then name a secondary (or contingent) beneficiary to receive 100% of the proceeds in case your primary cannot accept them for any reason.
• You can elect to have multiple beneficiaries split the proceeds. The percentages received do not have to be the same; you just need to ensure 100% of the benefits are accounted for.

You can also deploy a mix of these strategies. No matter how you designate beneficiaries, doing it correctly is critical to ensure they receive benefits.

It is always a good idea to name at least a secondary beneficiary in case your primary beneficiary dies before you do.

The importance of annual policy reviews

Life insurance is an important part of financial planning to help your loved ones maintain their quality of life after your death. While a spouse is usually the primary beneficiary on a life insurance policy, this is not always the case. A surviving spouse can be made a life insurance beneficiary, but it is not automatic.

Life insurance policies should be reviewed annually to ensure they are up-to-date and continue to meet your needs and those of your beneficiaries. This is especially important if you have experienced any significant life changes, such as marriage, divorce, the birth of a child, or changes to your health or finances.

During an annual review, you should consider:

• Current coverage and beneficiaries: Evaluate if any adjustments need to be made to the beneficiaries or the level of coverage.
• Family changes: Consider any changes to your family structure, such as marriage, divorce, or having children, which may impact who depends on your income and, consequently, your choice of beneficiaries.
• Financial changes: Review your finances, including any new loans, debt repayment, or income changes, to ensure your policy's death benefit can cover outstanding debts and living expenses for your beneficiaries.
• Health status: Assess any significant changes to your health or that of your loved ones. This may impact the amount of coverage needed, especially if you or your partner has high healthcare costs.
• Long-term goals: Think about your long-term financial goals, such as your spouse's retirement or your children's education, and ensure your coverage is sufficient to meet these goals.
• Policy type: Understand the type of policy you have and how the benefits are paid. Term insurance, for example, may become expensive as you get older, while whole life or universal life insurance provides lifetime protection.
• Beneficiary designations: Review your beneficiaries regularly to ensure they still align with your wishes. Consider any changes in your relationships and family dynamics, such as births, marriages, or divorces.
• Policy details: Read your policy carefully and look for answers to questions about premiums, benefits, interest effects, access to cash values, and the possibility of converting the policy.
• Estate planning: Ensure your life insurance policy aligns with your overall estate plan and that your beneficiaries can receive the proceeds without unnecessary delays or taxation.
• Consult professionals: If you have questions or need guidance, contact your life insurance agent, tax advisor, or family lawyer to ensure your policy is optimized for your current situation.

By conducting an annual review of your life insurance policy, you can have peace of mind knowing that your policy is up-to-date and that your loved ones will be protected and provided for according to your wishes.

Providing for minors

While it is possible to name a minor as a beneficiary of a life insurance policy, it is not recommended. This is because insurers will not pay them directly. Unless there is a trust with a named legal guardian, the court will appoint one, which is not ideal. The child's parent or another responsible adult would be a better choice as a beneficiary.

If you are considering leaving life insurance to a minor, it is important to understand the best way to do it. The best approach is generally to name an adult as the beneficiary of the policy and have them manage any proceeds that are paid out. An adult should also be responsible for investing those proceeds into an account specifically for the minor until they reach the legal age of adulthood.

Setting up trusts may also help simplify this process and ensure that a minor receives potential monetary benefits with minimal complications. It is essential for estate planners to discuss these arrangements with their clients to ensure that all assets are properly protected when leaving life insurance proceeds to minors.

In addition, it is important to note that minors lack the legal capacity to manage the proceeds of life insurance policies on their own. Therefore, it is essential to designate an adult guardian for the child during the estate planning process. This guardian can be responsible for ensuring that the child's share is used appropriately if the policyholder passes away.

Life insurance for minors is typically affordable, and it can be a wise gift for your legacy, providing a safety net for your child, future son- or daughter-in-law, and your grandchildren. By purchasing life insurance for minors while they are young and healthy, you can lock in low rates and protect their insurability.

Naming a charity as a beneficiary

If you want to name a charity as a beneficiary, it's important to note that there is no federal or state tax benefit for doing so. However, you can still make a meaningful donation and support causes that are important to you. Here are some key things to consider:

• Identify the cause you want to support: Choose a charity that aligns with your values and decide whether you want your donation to support a broader mission or have a more local impact. Make sure to get the organisation's full legal name and tax identification number.
• Consider giving as part of your estate plan: You can easily name a charity as a beneficiary in your documentation. You can also name multiple beneficiaries and contingent beneficiaries.
• Reach out to the charity in advance: Contacting the charity can help ensure that the gift is planned correctly and that any specific uses for the donation are outlined.
• Explore other options: You can also add a charitable giving rider to your policy, put your policy in a trust, or transfer a permanent life insurance policy to the charity. Consult a financial professional or estate planning attorney for guidance.

Now, let's shift our focus to the broader topic of whether a surviving spouse can be made a life insurance beneficiary.

The short answer is yes, a surviving spouse can be named as a life insurance beneficiary. In fact, a spouse is typically the primary beneficiary on a life insurance policy, as they are often reliant on the deceased's income for bills, housing, and other expenses. However, it's important to note that the policy owner has the right to choose any beneficiary they wish and can make changes as needed.

While a spouse can be a life insurance beneficiary, they cannot override the beneficiary designation unless there are specific exceptions outlined by state laws or court orders. In community property states, where assets acquired during a marriage are split equally, the surviving spouse may be entitled to half of the death benefit even if they are not named as the primary beneficiary.

It's always recommended to consult a legal or financial expert when navigating life insurance policies and beneficiary designations to ensure you understand your specific situation and options.

Frequently asked questions