Paul Sanchez
A beneficiary is a person or entity designated to receive the proceeds of a life insurance policy upon the insured's death. This can be a person, a charity, a trust, or your estate. The right to receive the proceeds of a life insurance policy can be assigned to a beneficiary, which means that the beneficiary is granted the right to receive the benefits of the policy. This is typically done through a transfer of ownership or rights from the policyholder to the beneficiary. This can be an important step in getting a life insurance policy, as it ensures that the benefits of the policy are distributed according to the policyholder's wishes.
| Characteristics | Values |
|---|---|
| Definition of beneficiary | The person or entity that receives the benefits from your financial products |
| Who can be a beneficiary? | Almost anyone can be a beneficiary, including people, organizations, and trusts |
| Primary beneficiary | The first in line to receive the life insurance death benefit if the insured dies |
| Contingent beneficiary | Receives the death benefit if the primary beneficiary dies before the insured |
| Irrevocable beneficiary | Cannot be changed without the beneficiary's approval |
| Revocable beneficiary | Can be changed, updated, added, or removed at any time |
| Allocation among beneficiaries | The death benefit can be allocated by dollar amount or as a percentage of the total benefit |
| Beneficiary information required | Full name, any former names, Social Security number, nationality, and passport number |
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What You'll Learn
Who can be a beneficiary?
The beneficiary of a life insurance policy is the person or entity designated to receive the proceeds of the policy upon the insured's death. This can be a person, people, or an organisation. The beneficiary will receive the life insurance payout, called the death benefit, when the insured person dies.
You can name more than one beneficiary, and you can choose how much of the payout each party receives. For example, you could allocate 50% to your spouse, 30% to your child, and 20% to a charity. The percentages must add up to 100%.
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. A contingent beneficiary, sometimes called a secondary beneficiary, will receive the death benefit if the primary beneficiary dies before the insured person.
Theoretically, you can name anyone you wish as a beneficiary. However, when you first apply for the policy, the insurance company will likely ask about your relationship with the beneficiary to establish an insurable interest. This means that the beneficiary has more to lose than gain by the insured person's death, whether that is financial or otherwise.
- Family members: spouses/partners, adult children, parents, and siblings
- Trusts: naming a trust as your life insurance beneficiary can protect assets from probate and ensure dependents are taken care of
- Charities: naming a charitable organisation as a beneficiary is a great way to leave a lasting impact
- Business partners: it is typical to name each other as beneficiaries if you co-own a business
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Primary and contingent beneficiaries
When setting up a life insurance policy, it's important to designate both primary and contingent beneficiaries. This ensures that your assets are handled according to your wishes.
Primary Beneficiaries
A primary beneficiary is the first person or entity 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 and specify how the assets should be divided among them.
Contingent Beneficiaries
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 is if the primary beneficiary or beneficiaries have predeceased you or cannot be found. You can name multiple contingent beneficiaries and set a percentage or amount of the payout for each to receive.
Why Both Types Are Important
Naming both primary and contingent beneficiaries is essential for comprehensive estate planning. Here are some reasons why:
- Avoid Probate: Properly designated beneficiaries can help avoid the lengthy and costly probate process.
- Ensure Wishes Are Fulfilled: Contingent beneficiaries ensure that your assets are distributed according to your wishes, even if the primary beneficiaries cannot receive them.
- Clarity and Security: Clear designations prevent disputes among potential heirs and provide peace of mind, knowing that your loved ones are taken care of.
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Irrevocable vs revocable beneficiaries
When setting up a life insurance policy, you can choose who will receive the payout, known as the beneficiary or death benefit. There are two types of beneficiaries: revocable and irrevocable. Understanding the differences between these two options is essential when making your decision.
Revocable Beneficiaries
A revocable beneficiary is the default option for life insurance policies. The policy owner has total control and can change the beneficiary at any time without the current beneficiary's consent. This flexibility is beneficial when adapting to changing life circumstances and goals. For example, if you get married and have children later in life, you may want to update the beneficiary on your policy.
Irrevocable Beneficiaries
An irrevocable beneficiary, on the other hand, cannot be changed or removed without the beneficiary's written permission. This means that once someone is designated as an irrevocable beneficiary, their rights are locked in, and they are guaranteed the benefit as long as the policy remains in force. The policy owner cannot make changes that would impact the beneficiary's rights without their approval.
When to Choose an Irrevocable Beneficiary
Irrevocable beneficiaries are often chosen in situations where financial security must be guaranteed, such as in loan agreements or divorce settlements. For example, a court may require an ex-spouse to be named as an irrevocable beneficiary to ensure the financial protection of minor children involved. Irrevocable beneficiaries are also used when a life insurance policy is put into an irrevocable trust for estate planning purposes.
Advantages and Disadvantages
The main advantage of naming an irrevocable beneficiary is that it ensures the money goes to the intended individual(s). It provides legal and financial stability and peace of mind for both parties. However, the primary disadvantage is the lack of flexibility. Once an irrevocable beneficiary is named, it is challenging to make changes without their consent, and removing them is nearly impossible unless they agree.
Reviewing Beneficiaries
It is recommended to review your beneficiaries regularly, especially after major life changes such as marriage, divorce, the birth of a child, or death. This ensures that your beneficiaries remain aligned with your current intentions and circumstances.
Seeking Professional Advice
When selecting the type of beneficiary for your life insurance policy, it is important to consider your specific situation and goals. Consulting a financial representative or legal advisor can help you make an informed decision and ensure that your policy aligns with your intentions.
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Choosing a life insurance beneficiary
Who can be a life insurance beneficiary?
Almost anyone can be a life insurance beneficiary, including people, organisations and trusts. Here are some common examples:
- A person, like your spouse.
- Multiple people, like your children.
- A charitable organisation.
- A legal entity, like your company.
Some insurers place limits on how many beneficiaries you can name. If your policy has a limit, be selective when compiling your list. The beneficiaries you choose when you purchase a policy must have an "insurable interest" in your life. This means they have more to lose than gain by your death, whether that's financial or otherwise. Most insurers will ask you to list the relationship you have with a beneficiary when you fill out the form (for example, "spouse", "friend" or "domestic partner").
Primary vs. contingent beneficiary
Primary life insurance beneficiaries are the first in line to receive the life insurance death benefit if you die.
Contingent life insurance beneficiaries, sometimes called secondary beneficiaries, receive the death benefit if the primary beneficiary dies before you do.
Multiple beneficiaries
If you name multiple beneficiaries—whether primary or contingent—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%. If you don’t list the percentages, the insurer may grant equal shares to each beneficiary.
Irrevocable vs. revocable beneficiaries
You cannot change an irrevocable life insurance beneficiary designation without the beneficiary’s approval. For this reason, irrevocable designations aren't common. However, they can be useful if you want to make sure the death benefit reaches a specific person, such as your child. Irrevocable designations can be used in a divorce agreement to ensure a former spouse isn't removed from the policy without consent.
In contrast, a revocable life insurance beneficiary designation is flexible. You can change, update, add or remove a revocable beneficiary at any time. This grants you the freedom to update your designation to match your current needs.
This decision isn't always a simple one. The right choice may not be the most obvious choice. Start by asking yourself why you have life insurance in the first place:
- Who relies on you financially and would need help paying ongoing bills if you die?
- Who would need financial support to cover costs incurred by your death, such as funeral expenses?
- Who would you like to leave money to regardless of whether they rely on you, such as a charity or a trust for your children?
You can avoid simple mistakes when designating a life insurance beneficiary by being as specific as you can. Make sure to include any identifying factors, such as each beneficiary’s full name, Social Security number, relationship to you, date of birth and address, so the insurer can locate your beneficiaries quickly. Consult with a legal professional to ensure you use the correct language.
Once you narrow down your options, ask yourself how much money each beneficiary would need, and divide the death benefit accordingly.
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Naming children as your beneficiaries
While it is possible to name your minor children as beneficiaries, it is not recommended. If you pass away before they reach the age of majority (typically 18 or 21, depending on the state), they will not be able to receive the life insurance benefit directly. A court will appoint an adult custodian who will manage the funds until your child turns 18. This process can be time-consuming and may delay your child from receiving the financial support you intended for them.
To avoid this, you can set up a trust for your child and name the trust as the beneficiary. This way, you can ensure that the funds are used for your child's needs and that they receive the benefit promptly without having to pay taxes or legal fees. Another option is to designate a custodian, who will be responsible for claiming and managing the death benefit on your child's behalf until they turn 18.
If you have a spouse, you can also name them as the primary beneficiary and the trust as the contingent beneficiary. This way, your spouse can continue managing your household finances and set money aside for your child's future. If both parents pass away, the trust can take over.
It is important to keep your beneficiary designations up to date and review them regularly, especially after major life events such as marriage, divorce, or the birth of a child.
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