Alyssa Lane
Life insurance is a crucial financial product that ensures your loved ones are supported after your death. The person or entity that receives the benefits from your policy is called the beneficiary. While it is not mandatory to name a beneficiary, it is highly recommended, as it ensures that your benefits are distributed as intended. By designating a beneficiary, you can also avoid probate, a lengthy legal process that can delay your loved ones from receiving their benefits. When choosing a beneficiary, you can select a primary beneficiary, who is first in line to receive the benefits, and a contingent beneficiary, who will receive the benefits if the primary beneficiary is unable to. It is important to keep your beneficiary designations up to date and make changes as necessary, especially after major life events such as marriage, divorce, or the birth of a child.
| Characteristics | Values |
|---|---|
| What is a life insurance beneficiary? | The named person, group, organization or other entity that will receive the life insurance death benefit payout after the policyholder passes away. |
| Why name a beneficiary? | To ensure the money goes to the intended person/people, to streamline the payout process, and to avoid probate. |
| Primary vs. contingent beneficiary | Primary beneficiaries are first in line to receive the death benefit. Contingent beneficiaries will receive the benefit if the primary beneficiary is deceased or otherwise unable to accept the benefit. |
| What happens if no beneficiary is named? | The death benefit may become part of the policyholder's estate and be settled during probate, or it may be paid out according to a default order of survivors stipulated in the insurance contract. |
| How to name a beneficiary | Fill out the appropriate fields on the insurance contract application, including the beneficiary's full legal name, contact information, and Social Security number (or tax ID number for organizations). |
| Who can be named as a beneficiary? | Any person, group, organization, or entity. Common choices include spouses, children, other family members, charities, and business partners. |
| Can beneficiaries be changed? | Yes, beneficiary designations can usually be changed at any time and for any reason. However, in some cases, the policyholder may need the consent of their spouse or the current beneficiary. |
What You'll Learn
The importance of naming a beneficiary
Naming a beneficiary is an important part of owning life insurance and other financial products. A beneficiary is the person or entity that you legally designate to receive the benefits from your financial products. Choosing who will receive your assets or the payout (called a "death benefit") from your life insurance policies is a decision you should consider carefully. While it is not mandatory to name a beneficiary, it is usually the reason people buy life insurance in the first place—to provide financial protection for loved ones after they're gone.
Avoiding probate
By naming a beneficiary, you can avoid probate, a legal process that can be lengthy, costly, and slow down how quickly money gets to loved ones. Probate is a legal process where a court sorts out your financial situation and determines how to distribute your assets. Without a named beneficiary, your payout will likely go through probate and be paid to your "estate" (all the money, property, and belongings you leave behind).
Streamlining the payout process
Naming a beneficiary leaves no confusion about who you want to receive the death benefit and streamlines the payout process so that it can happen much more quickly. It is important to keep your beneficiary designations up to date as your life changes (marriage, children, divorce, etc.).
Providing for loved ones
You can name multiple beneficiaries and decide how you want the money to be split between them. Most people name close relatives such as a spouse, sibling, or child as beneficiaries, but you can also choose a more distant relative or a friend. If you want to name a minor as your beneficiary, you should also appoint an adult guardian for the child in your will or use a trust.
Special circumstances
In some cases, you may want to name a charitable organization or business partner as a beneficiary. Additionally, if you have a family member with special needs, you may want to establish a special needs trust and name the trust as the beneficiary to ensure they remain eligible for government assistance.
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Primary and contingent beneficiaries
When setting up a life insurance policy, it is important to designate both primary and contingent beneficiaries to ensure your assets are handled according to your wishes. A primary beneficiary is the first person or entity in line to receive the death benefit from your life insurance policy. Typically, this is a spouse, child, or other family member.
You can name multiple primary beneficiaries and specify how the assets should be divided among them, usually by percentage. For example, if you have two children, you could name your son as the primary beneficiary and your daughter as a contingent beneficiary, with the son inheriting all the assets upon your death, unless he predeceases you, in which case your daughter would inherit. Alternatively, you could name them both as primary beneficiaries, with the son receiving half and the daughter receiving the remaining half.
A contingent beneficiary, also known as a secondary beneficiary, is the second in line to inherit the asset. The only way a contingent beneficiary inherits anything from the policy is if the primary beneficiary or beneficiaries have predeceased you or cannot be located. They are essentially a backup plan. You can designate multiple levels of contingent beneficiaries to ensure a clear line of succession.
Naming both primary and contingent beneficiaries is important for comprehensive estate planning. It helps to avoid probate, a lengthy and costly legal process, and ensures that your wishes are fulfilled, providing clarity and security for your loved ones.
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What happens if no beneficiary is named
If you don't name a beneficiary in your life insurance policy, the death benefit will be paid out to your estate and will likely have to go through probate. This is a legal process where a court determines how your assets, including life insurance policies, are distributed if you have not specified your wishes.
The probate process can be lengthy and complicated, and it may take years before your loved ones can access your assets. It can also be costly, as court fees and legal costs can reduce the death benefit payout. These problems can be exacerbated if you have multiple heirs, as there may be legal disputes and conflict among loved ones.
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 to avoid these potential issues and delays.
If you have a will, your estate, including the death benefit, will be distributed according to your wishes. However, if you do not have a will, the court may have to use your state's intestate laws, which may not align with your preferences.
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How to name a beneficiary
Naming a beneficiary is an important part of owning life insurance. A beneficiary is the person or entity you name in a life insurance policy to receive the death benefit.
To name a beneficiary, you must fill out an application for a life insurance policy. The application will have a section where you can write the name of your beneficiary or beneficiaries. After the insurance company approves your policy and it goes into effect, your beneficiary is set.
When naming a beneficiary, it is important to be as clear as possible and include their full legal name, social security number, and their relationship to you. This will make it easier for the insurance company to find them and prevent disputes from arising regarding the death benefits. For example, naming "wife [or husband] of the insured" without a specific name could mean an ex-spouse claims the benefit.
You can name multiple beneficiaries and decide how you want the money to be split between them. Usually, this is done by percentage.
There are two types of beneficiaries: primary and contingent. A primary beneficiary is the person first in line to receive the death benefit, typically a spouse or family member. A contingent beneficiary receives the death benefit if the primary beneficiary dies before or at the same time as the insured.
You can change beneficiaries by requesting a beneficiary designation form from your insurance company. Once processed, your new beneficiary takes effect.
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Who can be a beneficiary
When taking out a life insurance policy, you will be required to name at least one beneficiary. A beneficiary is the person or entity that will receive the benefits from your policy when you die.
There are two types of beneficiaries: primary and contingent. A primary beneficiary is the person or people first in line to receive the death benefit from your life insurance policy. Typically, this is a spouse, child, or other family member. A contingent beneficiary, sometimes called a secondary beneficiary, will receive the death benefit if the primary beneficiary dies before or at the same time as the policyholder.
Almost anyone can be a life insurance beneficiary, including people, organisations, and trusts. Here are some common examples:
- A person, like a spouse
- Multiple people, like children
- A charitable organisation
- A legal entity, like a company
Some insurers place limits on the number of beneficiaries you can name, so it's important to check this before compiling your list. The beneficiaries you choose must have an "insurable interest" in your life, meaning they would suffer more of a loss than a gain from your death, whether that be financial or otherwise.
It's also important to keep your beneficiary designations up to date, as your life changes (e.g. marriage, children, divorce).
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Frequently asked questions
Naming a beneficiary is not mandatory, but it is highly recommended. If you don't name a beneficiary, the cash payout from your policy will automatically become part of your "estate" and will have to go through probate, a lengthy legal process that costs money and slows down how quickly the money gets to your loved ones.
If you don't name a beneficiary, it may be unclear who is entitled to the funds, which can delay the benefit payment. In most cases, the death benefit will be paid to the owner of the policy if they are different from the insured person and still alive, or to the owner's estate.
Naming a beneficiary is as simple as filling out the appropriate fields on your insurance contract application. Fill in this information as completely as possible, including every beneficiary's full legal name, contact information, and Social Security number (or tax ID number if your beneficiary is an organization).
In most instances, you can select any person, group, organization, or other entity to be your life insurance beneficiary. Most people choose their spouse or their children as their beneficiaries, but you can also choose a more distant relative or a friend.
