Allotting Life Insurance Beneficiaries: Who Gets What?

Choosing a beneficiary for your life insurance policy is an important decision. A beneficiary is a person or entity that receives the benefits from your policy after your death. While it is not mandatory to name a beneficiary, it is the primary reason people opt for life insurance in the first place – to provide financial support to their loved ones. If you do not name a beneficiary, the death benefit will likely go to your estate, and the probate court will oversee the distribution of funds, which can be a lengthy process.

When choosing a beneficiary, you can name a person, a charity, a trust, or your estate. Most people choose their spouse, children, or other family members as beneficiaries. However, it is completely up to you, and you can also choose a business partner or a friend. If you have minor children, you can set up a trust and name it as the beneficiary to provide for them until they reach adulthood.

You can also have multiple beneficiaries and decide how much of the policy's death benefit will go to each person or group. It is important to keep your beneficiary designations up to date and make changes as needed, especially after significant life events such as marriage, divorce, or the birth of a child.

Naming a primary beneficiary

When choosing a primary beneficiary, it's essential to consider your unique circumstances and who would be most financially impacted by your death. If you have children, you may want to name your spouse as the primary beneficiary so they can use the proceeds to help provide for your kids. If you're a single parent, you might name a trusted family member or set up a trust as the beneficiary to ensure your child is taken care of financially.

It's also important to keep your beneficiary designations up to date, especially after significant life changes such as marriage, divorce, or the birth of a child. You can change your primary beneficiary at any time, but it's a manual process, so be sure to contact your insurance provider and fill out the necessary forms.

Additionally, when naming a primary beneficiary, be sure to provide specific information, including their full legal name, relationship to you, and contact details. This will help ensure a smooth transfer of benefits if the need arises.

Naming a contingent beneficiary

When purchasing life insurance, you will be asked to designate at least one primary beneficiary, and you should also name at least one contingent beneficiary. A contingent beneficiary, or secondary beneficiary, serves as a backup to the primary beneficiaries named on your life insurance policy.

If all your primary beneficiaries have passed away, your contingent beneficiaries will receive the payout. If you don't name a contingent beneficiary, your death benefit will be paid to your estate instead of to the people or organisations you've selected. Your payout will then be subject to estate taxes and go through probate court for a judge to determine the recipient.

You can name as many contingent beneficiaries as you'd like and portion out your estate in any ratio you wish, as long as the result adds up to 100%. Contingent beneficiaries can be people, organisations, estates, charities, or trusts.

While primary beneficiaries are typically those closest to you, contingent beneficiaries might be more distant. However, they should still be individuals or organisations you'd entrust with your payout. For example, you might name your spouse and children as primary beneficiaries, and your parents as contingent beneficiaries. If your parents pass away before you do, you could update your contingent beneficiaries to be your children.

It's important to keep your beneficiary designations up to date and review them throughout the entirety of your policy's term. After major life events, such as marriage, divorce, or the death of a loved one, check your policy to see if you want to make changes.

Who can be a beneficiary?

A beneficiary is the person or entity that you legally designate to receive the benefits from your financial products. For life insurance, this is the death benefit paid out by the policy. This can be one person or multiple people, and they don't have to be related to you. Here are some options to consider when choosing a beneficiary:

• Spouse: In community property states, you may be required to name your spouse as a beneficiary and give them a certain percentage of the benefit.
• Children: You can name your children as beneficiaries, but they must be over 18 or 21, depending on your state, to receive the benefit directly. If they are minors, you can set up a trust and name a custodian to manage the funds until they come of age.
• Other family members: Aside from your spouse and children, you can also name other family members, such as your parents or siblings, as beneficiaries.
• Close friends: You can choose a close friend to be your beneficiary, but be sure to get their consent first.
• Trust: You can establish a revocable living trust and name it as your beneficiary. This ensures that the funds are used according to your wishes and can be especially useful if you have minor children.
• Charities: You can name a charity or nonprofit organisation as your beneficiary, which can be a good option if your loved ones are already financially secure.
• Your estate: If you do not name a beneficiary, the death benefit will typically go to your estate and be distributed according to your will. However, this can result in a lengthy probate process and make it more difficult for your loved ones to access the funds.

Remember, you can choose multiple beneficiaries and decide how the benefit will be split between them. You can also name primary and contingent beneficiaries, with the latter receiving the benefit if the primary beneficiary is unable to. Keep in mind that some states have specific restrictions on who you can name as a beneficiary, so be sure to research your state's laws.

How to name a beneficiary

Naming a beneficiary is an important part of owning a life insurance policy. A beneficiary is the person or entity that you legally designate to receive the benefits from your policy or accounts when you die. While it's 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.

Understand the types of beneficiaries:

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. A contingent beneficiary, also known as a secondary beneficiary, will receive the death benefit if the primary beneficiary dies before or at the same time as you, or is otherwise unable to accept the benefit.

Choose your beneficiary:

When selecting a beneficiary, think about who you want to provide for after your death. This could be your spouse, children, grandchildren, parents, siblings, or other loved ones. You can also name a charity or organisation as a beneficiary if you wish to leave a legacy. If you have multiple financial obligations, you can choose multiple primary beneficiaries and outline the percentage of the policy payout each would receive.

Provide necessary information:

When naming a beneficiary, be specific and provide as much information as possible. Most beneficiary designations will require the person's full legal name and their relationship to you. Some designations may also request additional information such as mailing address, email, phone number, date of birth, and Social Security number. This helps the insurance company verify and locate your beneficiaries, making it easier and faster to pay out the benefits.

Keep your beneficiary designations up to date:

Remember to review and update your beneficiary designations periodically, especially after significant life changes such as marriage, divorce, the birth of a child, or the loss of a loved one. This ensures that your policy reflects your current wishes and circumstances.

Consult a professional if needed:

If you have any questions or concerns about naming a beneficiary, don't hesitate to seek guidance from a financial professional or attorney. They can help you navigate any complexities and ensure that your intentions will be carried out as desired.

When to update your beneficiary

It is important to keep your life insurance beneficiaries up to date, especially after major life events. Here are some circumstances when you should update your beneficiary:

Marriage or Divorce

If you get married or divorced, you may want to change your beneficiary to reflect this change in your life. In community property states, you may be required to name your spouse as your primary beneficiary. If you get divorced, you will need to manually remove your former spouse as a beneficiary if you no longer wish for them to receive the benefit.

Birth or Adoption of a Child

The birth or adoption of a child is another reason to update your beneficiary. You may want to add your child as a primary or contingent beneficiary, especially if you want to provide for them financially in the event of your death.

Death of a Beneficiary

If one of your beneficiaries passes away, you should review and update your life insurance policy. If your primary beneficiary dies before you and no alternate beneficiary is listed, the death benefit becomes part of your estate, triggering a probate procedure which may delay the disbursement of funds.

Other Significant Life Changes

Other significant life changes, such as a new estate plan, remarriage, or the death of a loved one who is listed as one of your beneficiaries, are also reasons to update your beneficiary information.

Regular Reviews

Even if there are no major life changes, it is a good idea to review your beneficiary information at least once a year to ensure everything is current. This will help capture any changes, such as a change of address for your beneficiary.

Remember, beneficiary changes must be made manually, and it is your responsibility to ensure your life insurance policy reflects your current wishes.

Frequently asked questions