Beneficiary Life Insurance: Who Benefits And How?

A life insurance beneficiary is a person or entity that the policyholder designates to receive the death benefit from their life insurance policy when they pass away. The beneficiary is paid the death benefit, and the policyholder can choose to have one or multiple beneficiaries, who can be family members, charitable organisations, legal entities, or a trust. The two main types of life insurance beneficiaries are primary and contingent. A primary beneficiary is the person or entity first in line to receive the death benefit, and a contingent beneficiary is a backup who will receive the benefit if the primary beneficiary dies or cannot be found.

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.

There are some restrictions on who you can name as a beneficiary. If you live in a community property state, you will need your spouse's consent to designate a primary beneficiary other than them. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Additionally, some states may require you to list your spouse as your primary beneficiary, receiving at least 50% of the benefit.

If you want to name a minor as a beneficiary, you can do so, but there are multiple legal avenues and implications. For example, the benefit could be placed in a trust managed by a custodian until the child turns 18 or 21, or it could be designated for uses that benefit the minor child. Speak with a lawyer before naming a minor as a beneficiary to determine the best option for your family.

How to choose a beneficiary?

Choosing a beneficiary for your life insurance policy is a very personal decision and can be challenging. Here is a guide to help you select the right beneficiary.

Understanding Beneficiaries

Firstly, it is important to understand what a beneficiary is and the different types available. A beneficiary is the person or entity that receives the payout, also known as the death benefit, from your life insurance policy if you pass away. There are two types of beneficiaries: primary and contingent. A primary beneficiary is the person or people who are first in line to receive the death benefit. A contingent beneficiary, also known as a secondary beneficiary, will receive the payout if the primary beneficiary is no longer alive or is unable to receive the benefit.

Who Can Be a Beneficiary?

Almost anyone can be a life insurance beneficiary. This includes individuals such as your spouse, children, or other family members, charitable organisations, legal entities such as your company, or a trust. Some insurers do place limits on the number of beneficiaries you can name, so it is important to check this before compiling your list.

Factors to Consider When Choosing a Beneficiary

When deciding on a beneficiary, it is essential to consider your unique circumstances and the reasons why you are purchasing life insurance. Here are some key factors to keep in mind:

• Insurable Interest: The beneficiary must have an insurable interest in your life, meaning they have more to lose than gain financially or otherwise by your death. This is a requirement by most insurers.
• Age: Minors under the age of 18 cannot receive benefits, so consider setting up a trust and naming a trustee to manage the funds until the child reaches the specified age.
• Ability to Manage Money: If your chosen beneficiary is not good with finances, consider establishing a trust and appointing a trustee to manage and disburse the funds on their behalf.
• Contingency: It is a good idea to name a secondary beneficiary to ensure that if your primary beneficiary dies before you, the benefits go directly to the secondary beneficiary without the need for probate.
• State and Policy Rules: Some states or insurance companies may have specific rules or restrictions on who can be named as a beneficiary, so be sure to research your state's laws and consult an attorney for legal guidance.
• Estate as a Beneficiary: Naming your estate as the beneficiary is generally not recommended as it may result in the benefits being subject to probate, which can be a lengthy and costly process.
• Review and Update: Life is full of changes, so it is important to review and update your beneficiary designations periodically, especially after significant life events such as marriage, the birth of a child, divorce, or the death of a beneficiary.

Common Scenarios

• Married with Children: In this case, most people name their spouse as the primary beneficiary, ensuring they can provide for the children and ease any financial burden. It is also a good idea to name contingent beneficiaries, usually the children's guardians.
• Married with No Children: Most people in this situation list their partner as the primary beneficiary and a parent as the contingent beneficiary. Other options include charities, family members you support financially, close friends, or siblings.
• Single Parent: If you are a single parent, you may consider naming your child as the beneficiary. However, note that life insurance companies cannot pay out to minors, so you will need to set up a trust or appoint a custodian to manage the funds until your child reaches the age of majority.
• Single with No Children: If you have any family members who co-signed on loans or mortgages, you may want to name them as beneficiaries to help them with the financial burden. Additionally, consider who would be responsible for your funeral arrangements and name them as a beneficiary to assist with the costs.

Remember, you can always change your beneficiary as your life circumstances evolve. It is crucial to review your policy regularly and make any necessary updates to ensure your wishes are carried out accurately.

Primary vs. contingent beneficiaries

When you take out a life insurance policy, you will be asked to designate at least one primary beneficiary. This 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 and specify how the assets should be divided among them.

A contingent beneficiary, also known as a secondary beneficiary, is the person or entity that stands to inherit the assets if the primary beneficiary is unable or unwilling to do so. This ensures that your assets are passed on according to your wishes, even if the primary beneficiary predeceases you or cannot be located.

For example, if you have two children and name your son as the primary beneficiary and your daughter as the contingent beneficiary, only your son would inherit the assets upon your death unless he predeceases you or can't be found, in which case your daughter would inherit the full sum. If you name them both as primary beneficiaries, they would split the assets according to the percentages you have decided on.

You can designate multiple levels of contingent beneficiaries to ensure a clear line of succession. This is important for comprehensive estate planning as it helps you avoid probate, ensures your wishes are fulfilled, and provides clarity and security.

While it is 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. If you don't name a beneficiary, it may be unclear who is entitled to the funds, which can delay the benefit payment.

Revocable vs. irrevocable beneficiaries

A beneficiary is the person or entity that receives the benefits from your financial products after your death. In the case of life insurance, this is the death benefit paid out by the policy.

There are two types of beneficiaries: primary and contingent. A primary beneficiary is the person or entity 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 is a backup beneficiary who will receive the death benefit if the primary beneficiary dies or cannot be found.

When choosing beneficiaries, you can select whether they are revocable or irrevocable. A revocable beneficiary can be changed at any time without the permission of that individual. Policies generally default beneficiaries to revocable, but there are particular reasons to make someone an irrevocable beneficiary. An irrevocable beneficiary cannot be changed without the written permission of that individual. The insurance company will require an irrevocable beneficiary's signature and consent before making any change to your policy. Ultimately, irrevocable beneficiaries have a more substantial right to your death benefit because you can't alter or cancel your life insurance without their permission.

An example of when you might choose an irrevocable beneficiary is in the case of divorce or separation. Each spouse can list their ex as an irrevocable beneficiary, so that if one spouse passes away, the other will still receive financial support in the form of life insurance funds. This prevents a former spouse from removing their ex from their policy without the other person's knowledge. Irrevocable beneficiary designations are also required when using a life insurance policy as loan collateral.

How to change your beneficiary

A life insurance beneficiary is the person or entity that the policyholder names to receive the death benefit payout in the event of their death. The policyholder can change their beneficiary at any time, but there are a few instances where approval may be needed. For example, if the policyholder lives in a community property state or has named an irrevocable beneficiary, they will need approval to make a change.

The process for changing a beneficiary may differ depending on the insurance provider, but generally, the policyholder will need to fill out a change of beneficiary form. This form will include information such as the policyholder's name, the new beneficiary's name, and the reason for the change. The policyholder may also need to provide a copy of their death certificate if the beneficiary is being changed due to their death. Once the form is completed, it must be submitted to the insurance company for approval.

• Contact your insurance company: Reach out to your insurance agent or company and inform them that you would like to change your beneficiary. They will provide you with the necessary forms and guidance.
• Fill out the change of beneficiary form: You will need to provide information such as your name as the policyholder, the new beneficiary's name, and the reason for the change. If the previous beneficiary has passed away, you may also need to include a copy of their death certificate.
• Submit the form for approval: Once you have completed the form, submit it to your insurance company for review and approval. They will let you know if any additional information or documentation is required.
• Inform your new beneficiary: After the change has been approved, be sure to inform your new beneficiary about the policy and where to find the relevant documents in case they need to file a claim.
• Regularly review and update your policy: It is important to keep your policy up to date, especially after major life events such as marriage, divorce, or the birth of a child. Review your policy annually and make any necessary changes to ensure your beneficiaries are current.
• Inform trusted advisors: Share the name of your insurance company and the location of your policy with trusted advisors, such as accountants or attorneys. This will help ensure that your wishes are carried out, and your beneficiaries receive the benefits in a timely manner.

Remember, while you can change your beneficiary at any time, there may be specific circumstances or state laws that impact your ability to make changes. Always review the terms of your policy and consult with a financial or legal professional if you have any questions or concerns.

Frequently asked questions