Life Insurance: Primary, Beneficiary, And You

Life insurance is a way to provide financial protection for your loved ones after you're gone. When you take out a life insurance policy, you'll need to choose a beneficiary – the person or entity who will receive the cash benefit or death benefit from your policy after you die. This can be a person, multiple people, a trust, or an organisation.

There are two types of beneficiaries: primary and contingent. A primary beneficiary is the person or entity who is first in line to receive the death benefit payout. You can name more than one primary beneficiary and allocate a percentage of the policy payout that each will receive. In the event that the primary beneficiary dies before the policyholder, or at the same time, a secondary or contingent beneficiary will receive the death benefit.

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 coverage, this is the death benefit your policy will pay if you die.

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, if you're married, your spouse may have to sign a waiver before you can name someone else as the beneficiary. In some states, you may be required to list your spouse as your primary beneficiary, and in others, you can name someone else with your spouse's written permission.

You can also name a charity, a trust, or your estate as a beneficiary.

Anyone who will suffer financially by your loss is likely your first choice for a beneficiary. You can usually split the benefit among multiple beneficiaries as long as the total percentage of the proceeds equals 100%.

Some people name a trustworthy adult—their spouse, for example—and rely on their judgment to consider giving money to benefit other family members or loved ones.

Children under the age of 18 can be named as a primary or contingent beneficiary. However, if the policyholder dies while they are still minors, the proceeds may be sent in their name to the legal guardian of the minor child's estate. To avoid this, another option is to create a trust and name the trust as the beneficiary.

It would seem logical to name someone who will need financial support throughout their lifetime as your beneficiary, but doing so could make them ineligible to receive government assistance. Establishing a special needs trust and naming the trust as the beneficiary is one way to channel your assets or life insurance death benefit to someone without triggering laws that may work against them.

Primary and contingent 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 the life insurance policy. Typically, this is a spouse, child, or other family member.

In the event that the primary beneficiary dies before or at the same time as the policyholder, most policies also allow for a backup beneficiary, called a secondary or contingent beneficiary. If the primary beneficiaries are all deceased, the secondary beneficiaries receive the death benefit.

Primary and contingent beneficiaries

When setting up a life insurance policy, it is important to designate a primary beneficiary—the first person or entity in line to receive the death benefit payout after your passing. You can name more than one primary beneficiary and specify how the assets should be divided among them.

In the case that the primary beneficiary dies before you, or at the same time, you should also name a contingent beneficiary, also known as a secondary beneficiary. This is a backup beneficiary who will receive the death benefit payout if the primary beneficiary is no longer alive or cannot be found. You can also name multiple contingent beneficiaries and set a percentage or amount of the payout for each to receive.

For example, if you name your spouse as the primary beneficiary and your children as contingent beneficiaries, your children would only inherit if your spouse dies before you. If you wanted both your spouse and children to collect the assets, you would name them all as primary beneficiaries. In this case, if your spouse dies before you, your children would remain equal primary beneficiaries.

It is important to keep your beneficiary designations up to date as your life changes, for example, after a marriage, birth, death, or divorce.

How to name a beneficiary

Naming a beneficiary is an important part of owning life insurance. A beneficiary is the person or entity that you legally designate to receive the benefits from your financial products. In the case of life insurance, this is the death benefit your policy will pay if you die.

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. You can name more than one primary beneficiary.

In the event 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 the primary beneficiaries are all deceased, the secondary beneficiaries receive the death benefit. You can also name multiple contingent beneficiaries.

When naming a beneficiary, it's important to be as specific as possible. Most beneficiary designations will require you to provide a person's full legal name and their relationship to you. Some will also ask for their mailing address, email, phone number, date of birth, and Social Security number. Providing as much information as possible will help the insurance company verify and locate your beneficiaries.

You can name almost anyone as a beneficiary, including a charity, a trust, or your estate. However, your state of residence or the provider of your benefits may restrict who you can name. For example, in some states, you may be required to list your spouse as your primary beneficiary. Make sure to research your state's laws before naming your beneficiary.

It's also important to keep your beneficiary designations up to date. Life events such as marriage, divorce, or the birth or adoption of a child may affect your choice of beneficiary. Review your beneficiary designation regularly to ensure your choice is still appropriate.

When to change a beneficiary

Yes, there is a primary beneficiary and the option of a secondary beneficiary on life insurance. The primary beneficiary is the person or entity who is first in line to receive the death benefit payout after your passing. You can name more than one primary beneficiary.

Now, here are some instances when you should consider changing a beneficiary:

• Life Changes: It is important to keep your life insurance beneficiaries updated, especially after major life changes. This includes events such as getting married, divorced, having a child, or adopting a child. For example, if you previously named a spouse as the beneficiary and you get divorced, you may want to update it to your current spouse or another family member.
• Death of a Beneficiary: If a beneficiary passes away, you should update your life insurance policy. In such cases, the death benefit will go to a contingent beneficiary or your estate if no changes are made.
• New Estate Plan: If you create a new estate plan, especially one involving trusts, you should consider changing or adding beneficiaries to your life insurance policy.
• To Include Children: If you have children who are under the age of 18, you may want to update your policy to include them as beneficiaries. However, keep in mind that children under 18 cannot directly receive the death benefit. You may need to set up a trust or custodial arrangement to manage the funds on their behalf until they reach the legal age.
• To Remove an Irrevocable Beneficiary: In rare cases, you may have named an irrevocable beneficiary, who usually cannot be removed from a policy without their approval. If you need to remove such a beneficiary, you will have to get their consent for the change.
• To Add or Remove Coverage: If you make changes to your coverage, such as increasing or decreasing the amount, you may want to review and update your beneficiaries accordingly.
• To Change the Percentage Distribution: If you want to change the percentage of the death benefit that each beneficiary receives, you should fill out a change of beneficiary form.
• To Comply with State Laws: Different states have different laws and restrictions regarding beneficiaries. For example, in community property states, you may need spousal consent to name someone other than your spouse as the beneficiary. Make sure to review your state's laws and update your beneficiaries if necessary.
• To Add a Charity: If you want to support a nonprofit organization, you can name a charity as a primary or contingent beneficiary. This allows them to receive all or a percentage of the death benefit payout.
• To Avoid Disputes: By regularly updating your beneficiaries and discussing any changes with your loved ones, you can help avoid potential disputes or confusion over your wishes.

Remember, as the policyholder, you have the right to change your beneficiaries at any time, as long as the policy is active. Keeping your life insurance policy up-to-date ensures that your benefits are distributed according to your wishes and provide financial protection for your loved ones.

What happens if you don't name a beneficiary?

It is not mandatory to name a beneficiary on your life insurance policy. However, this is usually the reason people buy life insurance in the first place—to provide a benefit to the people they care about. If you don't name a beneficiary, it may be unclear who is entitled to the funds, which can delay the benefit payment. The money will automatically become part of your "estate" (all the money, property, and belongings you leave behind). This means that it will have to go through probate, a legal process that costs money and slows down how quickly the money gets to loved ones. In some states, money paid to your estate can be claimed by creditors.

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 either case, the probate process can be lengthy and complicated, and it may take years before your loved ones can access your assets—which can be avoided if you designate them as beneficiaries. Therefore, it is important to name your beneficiaries when you get a life insurance policy.

Frequently asked questions