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A life insurance beneficiary can be a person, entity or organization you choose to receive the death benefit from your life insurance policy after you pass away. Once your beneficiary receives the payout, they can typically use the money however they want. In this guide, Bankrate insurance experts explain what a beneficiary is, what to consider when choosing one and how to assign one or more beneficiaries can make the life insurance buying process easier.
What is a life insurance beneficiary?
A life insurance beneficiary is the individual or entity designated to receive the policy’s death benefits upon the policyholder’s passing. This role is pivotal in life insurance arrangements, ensuring that the financial proceeds reach the intended recipients. In terms of what a life insurance beneficiary is, there are two main types: primary and contingent, both of which can be revocable or irrevocable in nature.
- Primary beneficiary: A primary life insurance beneficiary is the person who will receive any death benefits when the policyholder dies. You can have a sole beneficiary on a life insurance policy, or multiple primary beneficiaries. If you choose more than one person, you will have to designate a specific percentage for each beneficiary.
- Contingent beneficiary: A contingent beneficiary receives your death benefit if the primary beneficiary(ies) dies before funds are disbursed. The contingent beneficiary will also receive the payout if the primary beneficiary is unable to be found.
Although people often choose family members or close friends as beneficiaries, you can also name a charitable organization, business or a trust as your beneficiary.
Revocable beneficiary vs. irrevocable beneficiary
A revocable beneficiary is someone who is designated to receive the death benefit when you die but can also be removed as a beneficiary by the policy owner at any time and for any reason. When you make the change, you don’t need their signature — meaning the change can be done without the person ever even knowing.
An irrevocable beneficiary also receives death benefits when you die, but changes to irrevocable beneficiaries require both the policy owner and the beneficiary’s signatures. If both parties don’t sign the necessary documents, that person remains a beneficiary on your life insurance policy.
What to consider when choosing your beneficiary
When selecting a life insurance beneficiary, a critical factor to consider is the beneficiary’s age. Naming a minor is often not advised because insurers typically do not disburse policy proceeds directly to minors. Knowing this, you may want to set up other arrangements, such as appointing a trustworthy guardian or setting up a trust, to oversee the funds on behalf of the minor until they reach legal adulthood. This ensures that the financial benefits intended for their support are managed and distributed responsibly.
If the beneficiary is legally disabled, you may want to consider creating a special needs trust. This way, the beneficiary will be able to receive your death benefit without losing any government assistance.
Another aspect insurers may evaluate is the principle of insurable interest. When you buy a life insurance policy and name someone other than an immediate family member as a beneficiary on life insurance, you may need to prove the person or entity would face financial hardship without your income or financial assistance. Insurers prioritize this to ensure the policy serves a genuine protective purpose and isn’t subject to potential misuse. It’s important to note that the requirement for insurable interest exists at the time the policy is initiated, not necessarily at the moment of payout.
If you live in a community property state, and you want someone other than your spouse to be the beneficiary, you will need your spouse to sign a form waiving their rights to your death benefits. In a community property state, both spouses equally own any income made during the duration of the marriage as well as any property or belongings that may have been purchased with that income. If income earned during the marriage is used to pay the premiums for your life insurance policy, then that policy — and any money paid out from it — will be considered community property. This means that your spouse will be entitled to receive at least a portion of the payout. The following nine states are community property states:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
In the event of a remarriage, particularly when there are children from a previous marriage, you should be mindful of how you set up life insurance benefit distributions. Thoughtful planning can ensure you prioritize your new spouse and children’s financial well-being. Consulting with an estate planning attorney, financial advisor or licensed insurance agent can help you make informed decisions to ensure fair distribution of your death benefit among your loved ones according to your wishes.
How to name a beneficiary on your life insurance policy
You’ll name a beneficiary on your life insurance policy as part of the purchasing process by identifying them on a life insurance beneficiary designation form. This form is a legal document that your life insurance company uses to determine who receives your death benefits when you die. This document can override any last wishes you’ve made in your will, so it may be especially important to take your time determining who to name as your beneficiaries and how much each person should receive.
When filling out your life insurance beneficiary designation form, you will likely need as much of the following information as you can get about the person you’re naming as your beneficiary:
- Full legal name (first, middle and last name)
- Full address (street address, city, state, zip code, as well as country)
- Phone number (include both cell and landline if possible)
- Social Security number
- Date of birth
Keep in mind that many people choose a business or charitable organization as a beneficiary on their life insurance policy. This is an especially common choice for contingent or secondary beneficiaries — in the event your primary beneficiary dies before you do or does not accept the death benefit, there would be an organization specified to receive the funds. If you choose to include a business or organization as a beneficiary, you may need to provide:
- The full name of the organization or business
- The mailing address for a main office
- The business or organization’s tax ID number
Can you choose more than one life insurance beneficiary?
Yes, you can choose more than one person to receive your life insurance benefits. If you decide to choose multiple people as beneficiaries, you’ll have to decide how much of the death benefit they each receive.
You can choose between a specific percentage: per stirpes or per capita.
- Specific percentage: With this type of payout, each of your named beneficiaries receives a certain percentage of your life insurance death benefits. If you have two children, for example, you could designate that one would receive 30 percent and the other, 70 percent of your benefits.
- Per stirpes: This payout method may be useful if a named beneficiary dies before the policyholder or before the payout can be distributed. Instead of the entire life insurance payout going to the other named beneficiary, it is divided amongst the remaining family of the intended deceased beneficiary. For example, if you have two grown children, each with their own family, and one of them dies, the deceased’s children would receive their portion of your death benefit.
- Per capita: With per capita, each person who is eligible to receive your death benefits is given a percentage equal to everyone else’s. For example, if you have three grown children, and one of them dies, the other two would split your death benefit equally.
Lastly, while beneficiaries typically receive the death benefit payout as a tax-free lump sum, receiving the proceeds as installments is an option. In this scenario, the principal is kept with the insurance company to earn interest and provide a steady income stream for the beneficiary. However, it’s important to note that beneficiaries may owe taxes on earned interest if they choose to be paid in installments.
Frequently asked questions
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