Leaving A Beneficiary: Life Insurance Options And Opportunities

Life insurance is a crucial aspect of financial planning, enabling individuals to provide for their loved ones even after their demise. The process involves selecting a beneficiary, who will receive the death benefit or payout from the insurance policy upon the policyholder's death. This beneficiary can be a primary beneficiary, who is the first in line to receive the benefit, or a contingent beneficiary, who serves as a backup if the primary beneficiary is deceased. While most people choose their spouse or family members as beneficiaries, it is also possible to name a charity or organisation as the recipient of the insurance payout.

Who can be a beneficiary?

A beneficiary is the person or entity that you legally designate to receive the benefits from your financial products after your death. This can include a death benefit from your life insurance policy or the balance of your assets in retirement or investment accounts.

There are two types of beneficiaries: primary and contingent. A primary beneficiary is the person or persons first in line to receive the death benefit from your life insurance policy. Typically, this is a spouse, child, or other family member. In the event your primary beneficiary dies before or at the same time as you, most policies also allow you to name at least one backup beneficiary, called a "secondary" or "contingent" beneficiary. If there are no surviving primary beneficiaries, the secondary beneficiaries will receive the death benefit.

Almost any person can be named as a beneficiary, although your state of residence or the provider of your benefits may restrict who you can name. For example, in certain states, you may be required to list your spouse as your primary beneficiary, and they must receive at least 50% of the benefit. In some states, you can name someone else with your spouse's written permission.

You can also name a charity, trust, or your estate as a beneficiary. If you wish to leave money to minor children, you can name a trust as the beneficiary, which will hold the assets until they reach the age of consent. Alternatively, you can name a trustworthy adult as the primary beneficiary and rely on their judgment to distribute the money to your children.

It's important to keep your beneficiary designations up to date, especially after major life changes such as marriage, divorce, or childbirth.

What happens if you don't name a beneficiary?

While it is not mandatory to name a beneficiary on your life insurance, it is highly recommended. If you don't name a beneficiary, it may be unclear who is entitled to the funds, which can delay the benefit payment.

For retirement accounts like a 401(k), if you die without a beneficiary named, your assets will likely be held in probate—a legal process where a court has to sort out your financial situation and determine how to distribute your assets. This process can be lengthy and complicated, and it may take years before your loved ones can access your assets.

Most life insurance policies have a default order of payment if you do not name a beneficiary. For many individual policies, the death benefit will be paid to the owner of the policy if they are different from the insured person and still alive; otherwise, it will be paid to the owner's estate. For group insurance policies, the order typically starts with your spouse, then your children, then your parents, and then your estate.

If there is no default order specified in your policy, the payout may be paid to your estate or held in probate. In some states, money paid to your estate can be claimed by creditors. Therefore, it is almost always a good idea to name a beneficiary.

If your sole primary beneficiary passes away, the death benefit would go to any contingent beneficiaries you named when you applied for your policy. In the event that you did not designate any contingent beneficiaries, the death payout would likely go directly into your estate.

Can you change beneficiaries?

Yes, you can change the beneficiaries of your life insurance policy. The policyholder can change their beneficiaries at any time, although in specific cases, such as when an irrevocable beneficiary has been named, approval is required for any changes.

To change the beneficiary, the policyholder must contact their insurance company. A change of beneficiary form will need to be completed, which will include information such as the policyholder's name, the new beneficiary's name, and the reason for the change. The insurance company will then review the form and approve the change.

It is important to keep your beneficiaries up to date, especially after major life events such as marriage, divorce, or having a child. This ensures that the death benefit payout will go to the intended recipient.

What happens if your beneficiary is deceased?

If your beneficiary is deceased, the death benefit will go to a contingent beneficiary or your estate, depending on how you set up the policy.

Sole beneficiary is deceased

If your sole primary beneficiary passes away, the death benefit would go to any contingent beneficiaries you named when you applied for your policy. In the event you didn't designate any contingent beneficiaries, the death payout would likely go directly into your estate.

One of multiple beneficiaries is deceased

If you named more than one primary beneficiary and one of them dies, the remaining beneficiaries would be entitled to the death benefit. Typically, they'd each receive the same amount of money, but you can request a different type of distribution if you'd like.

Contingent beneficiary is deceased

If your contingent beneficiary passes away, and your primary beneficiary is also deceased, any remaining beneficiaries will receive the payout. If there are no remaining beneficiaries, there's a good chance the death benefit would be paid to your estate. Keep in mind that this will involve the probate process, which can take some time.

Beneficiary is an organisation that no longer exists

If you named an organisation as a beneficiary but it doesn't exist upon your death, the death benefit may be paid to your estate. A different organisation that has taken over the organisation you named may also collect the payout.

Per stirpes versus per capita distribution

As a life insurance policyholder, you can decide how your death benefit will be distributed if a beneficiary passes away before you. You have two main options for determining what happens to the deceased beneficiary's share: per stirpes and per capita distributions.

Per stirpes distribution ensures that a beneficiary's family is still included in the payout. Per capita distribution focuses on splitting the benefit among the surviving individuals rather than passing a portion to the heirs of a deceased beneficiary.

Can a spouse override a beneficiary?

Whether a spouse can override a beneficiary on a life insurance policy depends on several factors, including the type of policy, the state where it was issued, the state where the couple lived, and how the premiums were paid.

In most US states, a spouse cannot override a life insurance beneficiary. In these non-community property states, the spouse may not be entitled to any funds paid out by the deceased spouse's life insurance policy. The policy owner, who is usually also the insured, can name anyone they choose as the beneficiary, and only they can change the beneficiaries while the policy is active.

However, in community property states, certain types of life insurance policies may be considered community property if couples use community funds to pay for them. In these states, the policyholder's spouse is automatically considered the beneficiary, and the spouse may have a right to half the death benefit. The insurance company will divide the payout between the named beneficiary and the spouse according to the laws of that state. The community property states are:

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

Alaska and Tennessee are opt-in states, meaning spouses can choose to participate in community property laws.

In some states, the intent behind buying the policy and the timing are also factors, and there are exceptions to life insurance payout rules that vary by state.

Frequently asked questions