Who Can Be Your Life Insurance Beneficiary?

Life insurance is an important part of financial planning as it helps your loved ones maintain their quality of life in the unfortunate event of your death. When you buy a policy, it’s common to name your spouse as the primary beneficiary, but this is not always the case. The primary beneficiary is the person or entity named on the life insurance policy to receive the death benefit if you pass away. While the decision is ultimately yours, most people designate a spouse, child, charity, or multiple beneficiaries as their primary beneficiary.

Naming a beneficiary

The person or entity that receives the benefits from your financial products is called a beneficiary. Choosing a beneficiary is an important part of owning life insurance. The beneficiary is the person or entity that will receive the death benefit from your life insurance policy. This is a decision that should be carefully considered as it cannot be changed or corrected after you are gone.

You can name multiple beneficiaries and decide how you want the money to be split between them. Usually, the best way to divide the money is by percentage. It is important to keep your beneficiary designations up to date, especially when your life changes, for example, due to marriage, divorce, or the birth of a child.

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 that your primary beneficiary dies before or at the same time as you, most policies allow you to name at least one backup beneficiary, called a "secondary" or "contingent" beneficiary. If all primary beneficiaries are deceased, the secondary beneficiaries receive the death benefit.

Your beneficiary can be a person, a charity, a trust, or your estate. 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. Make sure you research your state's laws before naming your beneficiary. If you are a resident of certain states, you may be required to list your spouse as your primary beneficiary and designate them to receive at least 50% of the benefit. In some states, you can name someone else with your spouse's written permission.

Primary and secondary beneficiaries

When it comes to life insurance, a beneficiary is the person or entity that receives the benefits from your policy when you die. There are two types of beneficiaries: primary and secondary (also known as contingent).

The primary beneficiary is the person or entity first in line to receive the death benefit from your life insurance policy. Typically, this is a spouse, but it can also be children or other family members. If the primary beneficiary dies before the policyholder, or at the same time, the secondary beneficiary is the next in line to receive the death benefit. In the case of both the primary and secondary beneficiaries passing away, some people also designate a final beneficiary.

It is important to keep beneficiary designations up to date, especially after major life changes such as marriage, divorce, or the birth of a child. While it is not mandatory to name a beneficiary, it is usually the reason people take out life insurance—to provide a benefit to loved ones. If no beneficiary is named, the death benefit may be paid to the owner's estate and will likely have to go through probate, which is a lengthy legal process that delays access to funds.

In most states, the primary beneficiary will receive the full payout even if they are not the current spouse of the policyholder. However, in community property states, the spouse may be entitled to half the death benefit, with the other half going to the named beneficiary.

It is possible to name multiple primary and secondary beneficiaries and decide how much of the payout each should receive. However, the total percentage of proceeds must equal 100%.

Community property states

In community property states, life insurance policies are considered community property, and as such, the policyholder's spouse is automatically considered the beneficiary. This means that if one spouse purchases term life insurance coverage, the other spouse is generally the beneficiary unless another is specified. In the case that there is a beneficiary other than the spouse, the spouse cannot override this but is usually entitled to half of the death benefit. This is because the law in community property states splits community property in half.

There are nine community property states: California, Nevada, Washington, Texas, Wisconsin, Idaho, Louisiana, New Mexico, and Arizona. Tennessee and Arkansas are opt-in states, meaning spouses can elect to participate in the state's community property laws.

In community property states, life insurance policies may be considered community property if couples use community funds to pay for them. If a life insurance policy was purchased with community property income (i.e. if premiums were paid using community property money), the surviving spouse may file a life insurance claim for half or a portion of the policy proceeds if someone other than the spouse is listed as the beneficiary.

It is important to note that there are exceptions to these rules. For example, 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 spouse in community property states. This is because the Employee Retirement Income Security Act governs the beneficiaries of a federally-sponsored life insurance plan and overrules state laws.

Revocable vs irrevocable beneficiaries

A beneficiary is the person or entity that receives the benefits from your financial products after your death. While it is not mandatory to name a beneficiary, it is usually the reason people buy life insurance in the first place—to provide a benefit to the people they care about.

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.

When choosing a beneficiary, it is important to consider whether you want them to be revocable or irrevocable. A revocable beneficiary is someone you choose that can be changed at any time without their permission. The policy owner is in total control and can modify or cancel the policy as they see fit. On the other hand, an irrevocable beneficiary cannot be changed without the written permission of the beneficiary. Irrevocable beneficiaries have a more substantial right to your death benefit, and you cannot alter or cancel your life insurance without their permission.

While you can freely modify or cancel a policy with revocable beneficiaries, irrevocable beneficiaries are useful in certain situations. For example, in cases of divorce, second marriages, and blended families, naming an ex-spouse as an irrevocable beneficiary ensures they continue to receive financial support. Irrevocable beneficiary status can also be used when a life insurance policy is used as loan collateral; the lender would become the irrevocable beneficiary and is entitled to the death benefit.

In most cases, you may change the beneficiaries named on a life insurance policy at any time. However, in specific terms of a divorce or if you made an irrevocable designation, you may not be able to change or name a new beneficiary without the current beneficiary's consent.

Changing beneficiaries

There are a few instances when you may need approval to change the beneficiary name. These include:

• Giving power of attorney to someone
• Living in a community property state
• Naming an irrevocable beneficiary

It's essential to keep your life insurance beneficiaries up to date, especially if your life circumstances have changed, such as getting married, divorced, or having a child. For example, if you have named a previous spouse as the beneficiary but have since remarried, you may want to update the beneficiary to your current spouse.

If you have not named a beneficiary, the death benefit will be paid out according to a default order of payment. For 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 the spouse, then children, then parents, and then the estate.

Frequently asked questions