Listing Yourself As A Beneficiary: Is It Possible?

Life insurance is an important step in protecting your loved ones. When you take out a life insurance policy, you'll need to designate a beneficiary, and it's essential to choose someone who will benefit financially from your loss. While it's common to name a spouse or family member, you could also choose a close friend or a charitable trust. You can even name multiple beneficiaries, both primary and contingent, ensuring your assets are distributed according to your wishes. However, careful consideration is required when selecting a beneficiary to avoid legal and financial complications. For instance, naming minors or irrevocable beneficiaries requires special attention. Understanding the rules and procedures of life insurance beneficiaries is crucial for effective estate planning.

Naming a beneficiary

When choosing your life insurance beneficiaries, you should consider where those funds would have the greatest impact in the event of your death. Most people designate their spouse, significant other, children, or parents as beneficiaries, but you could also name a sibling, a close friend, or even a trust.

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 your spouse, children, or other family members. 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 the primary beneficiaries are all deceased, the secondary beneficiaries receive the death benefit.

You can name more than one beneficiary, as well as the percentage of the payout you want to go to each one. For example, you could allocate 50% to a spouse and 50% to an adult child.

It is important to keep your beneficiary designations up to date, especially after major life events like a marriage, divorce, the birth of a child, or a death in the family.

When naming a beneficiary, you will need to provide specific information, including:

• The full legal name of the beneficiary
• Their relationship to you (spouse, child, etc.)
• Their mailing address, email, phone number, date of birth, and Social Security number

Types of beneficiaries

There are two main types of beneficiaries: primary and contingent.

Primary beneficiary

A primary beneficiary is the person (or persons) first in line to receive the death benefit from your life insurance policy. Typically, this is your spouse, children, or other family members. If you name multiple primary beneficiaries, you can choose how much of the payout each party receives. For example, you might allocate 50% to your spouse, 30% to your child, and 20% to a charity. No matter how you divide a life insurance payout among beneficiaries, the percentages must add up to 100%.

Contingent beneficiary

A contingent beneficiary, also known as a secondary beneficiary, is a backup beneficiary who will receive the death benefit if the primary beneficiary dies before or at the same time as you. If all primary beneficiaries are deceased, the secondary beneficiaries receive the death benefit.

In addition to primary and contingent beneficiaries, beneficiaries can also be classified as either irrevocable or revocable.

Irrevocable beneficiary

An irrevocable beneficiary cannot be changed or removed without the beneficiary's approval. This type of designation is useful if you want to ensure that the death benefit goes to a specific person, such as your child. Irrevocable designations are also used in divorce agreements or certain business situations.

Revocable beneficiary

A revocable beneficiary can be changed, updated, added, or removed at any time. This type of designation is flexible and allows you to update your choice to match your current needs.

How to split the payout

When it comes to splitting the payout of life insurance, there are a few common methods to ensure your beneficiaries receive their intended shares. Here are the ways to divide the payout:

Per Stirpes

Per stirpes means dividing the payout by the branch of your family. For example, if you have two children, each is entitled to 50% of the payout. If one of them passes away before you, their share is passed on to their children, while the other share will be inherited by your living child. In this method, the descendants of the deceased beneficiary equally share what their parent would have inherited if they were alive.

Per Capita

Per capita means dividing the payout by the total number of surviving beneficiaries. For instance, if you have five living descendants, each will receive an equal share of 20%. If one of them passes away, the remaining four will each receive 25%. In this method, any predeceased descendants will not be included in the payout plan.

Life Insurance Trust

You can also choose to set up a life insurance trust and designate a trustworthy estate-planning attorney to oversee it. This option is suitable if you don't want to name your descendants as primary beneficiaries.

Specified Percentages

You can specify the percentage of the payout each beneficiary will receive. For example, you may want to allocate 70% to your spouse and 30% to your parents or children. This method is useful when beneficiaries have differing levels of financial dependence on you.

It is important to note that you can change how your policy's payout is split between beneficiaries at any time. Regularly reviewing and updating your beneficiary designations is crucial to ensure your intentions are carried out.

Changing beneficiaries

Who can change the beneficiary?

Only the policyholder can change the beneficiary designation in most cases. The policy owner is the only person who can change beneficiaries unless they have granted someone else power of attorney. A power of attorney is a legal document that lets someone make financial, legal, or medical decisions on your behalf.

There are two circumstances when you need another person's permission to update a beneficiary: if you live in a community property state or if you named someone as an irrevocable beneficiary.

You should review your policy regularly and consider adjusting your coverage after a significant life event, such as:

• The birth or adoption of a child
• The death of a beneficiary
• A new estate plan where trusts are being used
• Marriage or divorce

To change the beneficiary of your life insurance policy, you need to contact your insurance company. You will need to submit a change of beneficiary form online, on paper, or over the phone. The form will ask for personal information about your beneficiary, such as their Social Security number.

The process for changing a beneficiary may differ depending on the provider, and some providers may require a fee.

Not naming a beneficiary

In most cases, if you don't name a beneficiary, the death benefit will go to your estate and will be subject to probate. Probate is a legal process where a court determines how your assets, including life insurance policies, will be distributed if you have not specified your wishes. This process can be time-consuming, taking from a few weeks to over a year, and costly, with court fees and legal costs reducing the death benefit payout. It can also cause conflict among loved ones.

If you have a retirement account, such as a 401(k), and you die without naming a beneficiary, your assets will likely be held in probate as well. The court will then have to sort out your financial situation and determine how to distribute your assets.

To avoid these potential issues, it is essential to name at least one beneficiary on your life insurance policy and keep your beneficiary designations up to date as your life changes.

Frequently asked questions