Life Insurance: Spouse As Beneficiary, A Must?

Choosing a life insurance beneficiary is an important decision that requires careful consideration. While it is not mandatory to name a beneficiary, doing so ensures that the benefits are distributed according to your wishes. In most cases, the primary beneficiary is the spouse, followed by children or other family members as contingent beneficiaries. However, it is essential to keep beneficiary designations up to date, especially after major life changes such as marriage, divorce, or the birth of a child. Additionally, the laws governing beneficiaries vary across states, and it is crucial to be aware of any restrictions or requirements specific to your state of residence.

Primary vs. secondary beneficiaries

When you take out a life insurance policy, you will be asked to name a primary beneficiary. This is the person or entity who is first in line to receive the death benefit from your policy. Typically, this is a spouse, child, or other family member.

In the event that your primary beneficiary dies before you or at the same time as you, you can also name a secondary or contingent beneficiary. This is a backup who will receive the death benefit if the primary beneficiary is no longer alive to do so.

You can name multiple primary and secondary beneficiaries, and 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 specify the percentages, the insurance company may grant equal shares to each beneficiary.

It's important to keep your beneficiary designations up to date. You can usually change beneficiaries at any time by filling out a beneficiary designation form, but check with your insurance company to be sure.

Naming children as beneficiaries

While it is possible to name your children as beneficiaries of your life insurance, it is not recommended. This is because minors cannot be paid the death benefit directly, and the payout can be complicated. If you die while your children are still minors, a court will appoint an adult custodian to manage the funds from the payout. This process can take several months, during which time your children will not be able to access the financial support you intended for them.

If you want your life insurance payout to go to your minor children, it is recommended that you set up a trust for them. This way, they can receive the benefit promptly and without having to pay taxes or legal fees. A trust can be an effective solution for leaving money to children, as you can set up a life insurance trust and have a trustee oversee the funds and distribute the money according to your wishes. You can also dictate that the funds are held until the child reaches an age that you deem suitable, rather than when they reach the age of majority.

Another option is to designate a custodian to help your minor children claim and manage the death benefit. A custodian is responsible for claiming the death benefit on your child's behalf and will manage the money until your child turns 18. It is important to name a custodian that you trust to act in your child's best interest.

If you are a single parent, you may also want to consider naming your spouse as the primary beneficiary and your trust as the contingent beneficiary. Your spouse can continue managing your household finances and set money aside for your child's future. If you both pass away, the trust can take over.

Naming your estate as your beneficiary

If you name your estate as your beneficiary, the payout will be subject to probate, a legal process where a court determines how to distribute your assets. This can be lengthy and complicated, and it may take years before your loved ones can access your assets. Additionally, in some states, money paid to your estate can be claimed by creditors, meaning your loved ones could get less money.

Even if you have a will, your estate and assets will first go through probate court, where a judge determines what debts you owe. If you have any outstanding debts, creditors will be able to collect repayment from your estate before the rest is distributed according to your wishes.

To avoid this, you can name specific beneficiaries on your life insurance policy. This ensures that the funds go directly to the beneficiary without being wrapped up in your estate.

However, if you want to connect your life insurance to your estate, you can set up a trust. Any assets included in a trust do not have to go through probate court. It is important to work with an estate planning attorney and a financial advisor to ensure your belongings and the life insurance payout are distributed according to your wishes.

Therefore, while it is possible to name your estate as your beneficiary, it is generally not advisable as it can cause delays and reduce the amount received by your loved ones. Instead, consider naming specific beneficiaries or setting up a trust to ensure a smooth distribution of your assets.

Irrevocable vs. revocable beneficiaries

When it comes to choosing beneficiaries for your life insurance policy, you have the option of selecting either revocable or irrevocable beneficiaries. This is an important decision, as it will determine the level of flexibility you have in changing your beneficiaries in the future. Here is a detailed overview of the differences between the two:

Irrevocable Beneficiaries

An irrevocable beneficiary is a beneficiary that cannot be changed without the written permission of that individual. This type of designation is generally used when the policyholder wants to ensure that certain assets go to a specific person, such as a child. It is also commonly used in divorce settlements or separation agreements to ensure that a former spouse cannot be removed from the policy without consent. In Quebec, if you name your legal spouse as your beneficiary, they automatically become an irrevocable beneficiary unless you specify otherwise or divorce.

Irrevocable beneficiaries have a more substantial right to the death benefit, as the policyholder cannot alter or cancel the life insurance policy without their permission. This ensures that the death benefit will be paid out according to the policyholder's wishes and protects it from creditors.

However, one disadvantage of choosing an irrevocable beneficiary is the lack of flexibility. If your circumstances change and you want to modify your beneficiaries, you may not be able to do so without the consent of the designated beneficiary. Therefore, it is important to choose irrevocable beneficiaries carefully.

Revocable Beneficiaries

In contrast, a revocable beneficiary is a named beneficiary that can be changed at any time without the permission of that individual. This type of designation allows the policyholder to remain in full control of their life insurance policy and make changes as their circumstances evolve.

For example, if a policyholder selects their two adult children as revocable beneficiaries, each receiving 50% of the death benefit, but over time, one child takes on more responsibility for the policyholder's care, the policyholder can modify the death benefit to provide a larger payout to that child without requiring the consent of the other.

While irrevocable beneficiaries offer the advantage of ensuring that the death benefit is distributed according to the policyholder's wishes, they lack the flexibility that revocable beneficiaries provide. Revocable beneficiaries allow policyholders to adapt their life insurance policies to changing circumstances, such as divorce or financial changes, without requiring the consent of the beneficiaries. Ultimately, the decision between choosing revocable or irrevocable beneficiaries depends on the policyholder's specific needs and preferences.

Choosing a life insurance beneficiary

Who can be a beneficiary?

Almost anyone can be a life insurance beneficiary, including people, organisations, and trusts. Some common examples of life insurance beneficiaries are:

• 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, so 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.

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.

Frequently asked questions