An important part of owning life insurance is officially choosing and documenting your beneficiaries – the people or entities who would receive the benefits from your coverage.
Choosing who will receive the payout (called a “death benefit”) from your life insurance policy is a decision you should consider carefully because a beneficiary designation can’t be changed or corrected after you’re gone.
It’s important to keep your beneficiary designations up-to-date as people move in and out of your life. Here is some basic beneficiary information that may help.
What is a beneficiary?
A beneficiary is the person or entity that would receive the death benefit from your life insurance coverage if you were to 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 your spouse, children or other family members.
In the event your primary beneficiary dies before or at the same time as you, most policies also 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.
Why do I need to name a beneficiary?
Life insurance benefits are generally not governed by your will, so the only way to make sure your policy's benefits are paid to the people you intend is to make sure you've named a beneficiary.
Although it is not mandatory that you 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.
What happens if I don't name a beneficiary?
Most life insurance you get through your employer has a default order of payment if you do not name a beneficiary. Typically, the order 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 be held in probate, meaning it will go nowhere until a court-appointed administrator can sort out your financial situation. That process can take a long time.
How to name a beneficiary
Most insurance companies provide a form or website for you to designate your beneficiary so they have it on file with your other policy information.
If your life insurance is through your employer, they may keep your beneficiaries on file rather than the insurance company, since you may also need to name beneficiaries for your retirement plan, profit-sharing plan or other benefits.
What information do I need to provide?
When you name your beneficiary, be specific. Most beneficiary designations will require you to provide a person’s full legal name and their relationship to the insured person (spouse, child, mother, etc.). Some beneficiary designations also include information like mailing address, email, phone number, date of birth and Social Security number.
Providing as much information as possible will help the insurance company locate and verify your beneficiaries, making it easier and faster for them to pay your beneficiaries, who may need the benefit of your policy immediately for your final expenses.
Can anyone be named as a beneficiary?
Your beneficiary can be a person, a charity, a trust, or your estate. Almost any person can be named as a beneficiary, although your state of residence or the insurance carrier may restrict who you can name as a beneficiary.
Immediate family as beneficiaries
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 equal 100 percent.
Some people name a trustworthy adult — their spouse, for example — and rely on them to use the money to benefit other family members or loved ones.
Make sure you research your state’s laws before naming your beneficiary. If you are a resident of certain states, you may be required to list your spouse as your primary beneficiary and designate him or her to receive at least 50 percent of the benefit. In some states, you can name someone else with your spouse’s written permission.
Naming minors as beneficiaries
Life insurance companies generally won’t pay benefits directly to minors, so consider naming an adult to act as custodian on their behalf.
Another common solution to make accommodations for children is through the creation of a trust. In that case, you can name the trust as the beneficiary.
Whatever arrangement you choose, minor children may not be able to access your life insurance proceeds until they reach the legal age of consent — so if you want the payout used for their benefit while they are still children, you may want to set up a trust or custodial arrangement. Talk with an attorney for help in setting up the best vehicle for your situation.
Special needs and other lifelong dependents as beneficiaries
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 — which might mean a significant loss in financial support for them.
Establishing a special needs trust and naming the trust as beneficiary is one way to channel your life insurance death benefit to someone with special needs without triggering laws that may work against them. Consult an attorney who specializes in estate planning to learn more about your options.
Naming charities or organizations as beneficiaries
Many people name charities and other cause-related organizations as beneficiaries.
If you have a nonprofit you feel passionate about, you can name it as a primary or contingent beneficiary to receive all or a percentage of the payout. Doing so can be an impactful way to leave a legacy.
Can you change beneficiaries?
In most cases, you may change the beneficiaries named on your policy at any time, and changing beneficiaries is usually easy to do — the challenge is often in remembering to do it. Contact your employer or insurance company to learn how.
In some circumstances — like in specific terms of a divorce or if you made what's called an "irrevocable designation" — you may not be able to change or name a new beneficiary without getting your current beneficiary's consent.
Similarly, if you have transferred ownership of your life insurance policy to someone else, you are no longer the owner of your coverage — so you cannot change the beneficiary.
Generally, you or your attorney will know if any of these cases apply to you.
When to update your beneficiaries
Beneficiary changes are often overlooked following divorce, remarriage or after the death of a loved one who may be listed as one of your beneficiaries.
An easy way to remember to keep your beneficiaries up to date is to use your company’s open enrollment event to revisit the details of your policy.
If you don’t have life insurance through your employer, set a date that you will remember each year — May Day, Labor Day, your birthday — and spend ten minutes that day checking your policy.
Can the wrong person receive your payout?
If you fail to keep your beneficiaries up to date or make a mistake in documenting them, someone other than who you intended may receive the proceeds. This is why carefully designating and remembering to update beneficiaries is so important.
If you are worried about making a mistake when naming your beneficiaries, consult with a financial professional or attorney to ensure your intentions will be carried out the way you wish.