In the wake of lifestyle changes and the move to nuclear families, many people are buying life insurance policies to offer financial protection to their families.
For the unacquainted, life insurance is an agreement between you and an insurance company, where the insurer agrees to pay a lump sum to a designated beneficiary in the event of your death. But who do you choose as your beneficiary?
A life insurance beneficiary is a person or entity that will receive the benefits from your life insurance policy when you die.
As such, choosing a life insurance beneficiary is a highly personal decision that depends on one’s values and financial circumstances.
If you have just purchased a life insurance policy or are planning to buy one and are contemplating who should be the beneficiary of your policy, this post will discuss everything you need to know about life insurance beneficiaries.
Table of Contents
What is a life insurance beneficiary?
As the name suggests, a life insurance beneficiary is the person or entity that you legally designate to receive the benefits of your life insurance policy when you pass away.
In other words, a life insurance beneficiary is a person or entity that will receive the set death benefits after your death.
What is a contingent beneficiary in life insurance?
A contingent beneficiary is a person alternatively named to receive benefits from financial products when the policy’s primary beneficiary is unable to receive the benefits.
In insurance contracts, a contingent beneficiary can only receive the benefits if all primary beneficiaries are deceased, unable to be located, or refuse to accept the benefit.
In life insurance contracts, a contingent beneficiary is a backup option because they can receive the death benefit only if certain predetermined conditions are fully met.
When purchasing a life insurance policy, it is a good idea to name a contingent beneficiary; just you should for your other financial products like will or trust.
That way, you take care of “what if” scenarios while ensuring that your assets go to the people or entities you desire.
If you don’t name a contingent beneficiary and the primary beneficiary is unable to claim the benefits, a judge decides where the money goes.
As this can take months, it means your loved ones might not get the financial support you intended for them.
How to Choose a Life Insurance Beneficiary
Aside from minors, there are almost no rules restricting who you can name as your beneficiary.
Besides, life insurance beneficiaries are completely separate from those in your will, meaning the two lists do not necessarily need to overlap.
Precisely, your beneficiary can be any person or entity of your choice.
Here are tips to help you choose beneficiaries:
- Keep the policy’s purpose in mind:
When purchasing a life insurance policy, you do so because you have a goal for the payout.
This goal should drive your choice. For instance, if you want to provide financially for your family, your spouse or children might make a perfect choice.
You can name a business partner if you want your company to continue or name a charity if you want to achieve your philanthropic goals.
- Know your option:
There is always more than one option when it comes to choosing life insurance beneficiaries.
Although the purpose of purchasing the policy may limit your options, you will almost certainly have a variety. The idea is to choose the person or identity that needs the benefit most.
- Know the rules:
While there are almost no rules for naming beneficiaries, there are a couple of things to consider. Basically, minors can’t be designated as beneficiaries because of their general legal incapacity.
If you’re married and live in community property states, there are rules requiring your partner to waive their rights, particularly if you want to designate someone else as a beneficiary.
- The ideal choice is not always a person:
When selecting a beneficiary, you always have to remember that an entity can be named as a beneficiary. Because entities are there to stay, they can be excellent contingent beneficiaries.
You can also avoid naming a person to avoid disagreements in case of a divorce or other issues.
- Consider multiple beneficiaries:
When designating beneficiaries, it is a good idea to name multiple beneficiaries and, if necessary, designate how much goes to each. Having a contingent beneficiary is a smart option should the primary beneficiaries predecease you.
If you intentionally name a minor as a beneficiary, make sure to specify when and how the named minor will receive their funds.
As long as you live, you will also need to adjust your beneficiaries as your life changes. This will also help your life insurance provider know what to do when you die.
The idea is, re-evaluate your beneficiaries from time to time, especially when you undergo a significant life change, including divorce.
Of significance, when selecting beneficiaries or updating the list, make sure that your current situation is reflected in the insurance plan and your will.
Remember that your policy MUST pay the beneficiary no matter what your will says.
What’s a Primary Life Insurance Beneficiary?
Essentially, a primary life insurance beneficiary is the person or entity that is first in line to receive death benefits upon the death of the policyholders. The keyword here is “first in line”.
When selecting a primary beneficiary of your life insurance, you have the option to name one person or multiple persons or a legal entity as your primary beneficiaries.
If you designate multiple primary beneficiaries, it is a good idea to specify how the benefits are to be divided among the beneficiaries.
This will minimize or possibly eliminate the chances of disputes arising due to the death benefits.
It is extremely important to ensure that your primary beneficiary is legally competent to receive the death benefit.
Whomever you choose as your primary beneficiary, make sure to let them know you have designated them. This will ensure that they act accordingly when you pass.
What’s a Revocable Life Insurance Beneficiary?
A revocable beneficiary is a named beneficiary who the policyholder can change later if needed. In other words, a revocable beneficiary has no guaranteed rights when it comes to receiving the death benefits.
It should be no surprise that a revocable beneficiary is the most common type of life insurance designation.
With a revocable beneficiary, policyholders have the right to update or change the designated beneficiary without the consent of beneficiaries.
As a policyholder, you can change the percentage of the payout that goes to each beneficiary with minimal hassle.
Beneficiaries have no say in any changes you make, this type of life insurance policy designation gives ultimate freedom to change beneficiaries when your situation or priorities change.
What’s an Irrevocable Life Insurance Beneficiary?
An irrevocable beneficiary is named a beneficiary with guaranteed rights to a life insurance policy’s payouts.
When you name an irrevocable beneficiary on your policy, you give that beneficiary specific rights to your policy, which can impact you in a number of ways.
For instance, you can’t change an irrevocable beneficiary without their consent. The irrevocable beneficiary has to sign off any changes should you decide to change the beneficiary on your policy.
Who should be the beneficiary of a life insurance policy?
Selecting a life insurance beneficiary is a highly personal decision, which depends on a number of factors, including the purpose of the policy, personal values, and financial circumstances.
With almost no rules restricting who you can choose as your beneficiary, it means you can choose just about any person or entity imaginable.
A life insurance beneficiary can be a person, charity, trust, business, and any other legal entity. You can choose a spouse, child, relative, friend, secret lover, or any other person you happen to know to benedict from your life insurance policy.
When contemplating who should benefit from your policy, beware that some states require your spouse’s waiver before you can designate any other person as your beneficiary.
While it is not a legal or insurer restriction, there are some things you need to consider before making the decision on who should be the beneficiary of your life insurance policy.
It is common knowledge to name your spouse of children beneficiaries, especially if they depend on you financially.
No matter who you choose to be your beneficiary, it is recommended you and your beneficiary not be separate identities.
This is because the IRS might view the death benefits as a gift to the beneficiary and be subjected to taxing.
Of significance, you should also be careful not to unwittingly disqualify your beneficiary from other benefits.
For instance, naming an aged, blind, disabled person as a beneficiary may result in reduction or suspension of their Supplemental Security Income (SSI) or Medicaid benefits, based on program eligibility.
Who gets life insurance if a beneficiary is deceased?
On rare occasions, your life insurance beneficiary predeceases you or dies at the same time as you (say in a fatal car accident).
In such a scenario, the death benefits may be paid to the contingent beneficiaries. If there are no contingent beneficiaries, then the death benefit will almost certainly be paid directly to your estate.
Notably, if life insurance benefits are to be paid to the insured’s estate, the full amount of the policy will go through a probate court, where it is open to public scrutiny, meaning creditors can seize it.
In extreme cases, your relatives, business associates, and friends may try to get the death benefits, increasing the chances of the money not ending up in the hands of someone you intended.
Who can change the beneficiary on a life insurance policy?
A life insurance policy is designed to protect your loved ones when you die. But, honestly, there are a lot of big events that life may present, from marriages and new babies to the passing of family members.
For the most part, these events change our situation, ultimately changing our priorities.
At the end of the day, you may want to change who you want to receive the benefits of your policy. So, who can change the beneficiaries on your life insurance policy?
In most cases, only the policyholder can change a life insurance policy’s beneficiaries. If you live in a community property state or have an irrevocable beneficiary, you will need permission to make changes.
Precisely, the irrevocable beneficiary or your spouse has to sign off the changes.
Besides, if you have granted someone power of attorney, they may have the right to change the beneficiaries on your life insurance policy.
Above all, it is worth noting that no one has the power to change beneficiaries after the death of the policyholder.
Life insurance beneficiary rules
Purchasing a life insurance policy offers a great way to protect and provide for loved ones when you pass away. In this regard, you want to ensure that the right beneficiaries inherit your money.
As for life insurance beneficiary rules, each insurance company establishes its own set of rules for its life policies. The rules usually revolve around who can make a beneficiary, the types of beneficiaries, and the number of beneficiaries you can have on a policy.
Typically, life insurance providers do not place harsh restrictions on who you can name as a beneficiary of your policy. However, some providers limit the number of primary and contingent beneficiaries you can have on your policy.
While you can name a minor as a beneficiary, it is not strongly discouraged because the minor won’t be able to access the death benefits until they reach the age of majority.
All in all, after naming a minor as a beneficiary of your life insurance policy, you can ensure that the named minor uses the money to cover immediate expenses by selecting a guardian or creating a trust.
Whilst knowing that life insurance beneficiary rules perfectly rhyme with common knowledge, it is worth noting that beneficiaries have their rights.
For instance, life insurance beneficiaries have a right to be notified that they are the beneficiary of your policy. They also have the right to know the total amount of death benefit.
Life insurance beneficiary: spouse or child?
If you recently became a parent, the safety and well-being of your child are paramount. Well, while parenting is one of the key motivators to get life insurance, who do you name as the beneficiary of your life insurance policy: your spouse or your child?
While you have the freedom to choose whomever you want to benefit from your policy, the subject of spouse vs. child can be conflicting. Thankfully, you can designate multiple beneficiaries for your policy.
In the real world, most couples name their spouse as the beneficiary of their life insurance policies. Others name their child(ren) as beneficiaries, while others name their spouse and children as beneficiaries.
Are you contemplating between your spouse and children? Before making the big decision, you want to consider how your passing would affect your family financially.
If you have dependent children, your benefits may be used to help them cover future education. In such a case, you may consider including your child in the list of beneficiaries.
If the child in question is a minor, there is no harm in naming your spouse as the primary beneficiary, hoping he/she will take care of the child’s needs.
Besides, you can name both your spouse and child(ren) as beneficiaries. To minimize potential disputes from arising, just make sure to specify the amount to go to each beneficiary.
In the case where you only want to defray your final expenses (you don’t have dependents, and the spouse can make ends meet in your absence), you can choose either your spouse or child as the beneficiary.
Just make sure the named beneficiary will act responsibly.
The subject of who should be your beneficiary is hard. In the long run, it boils to your personal decision.
What information do you need to make someone your beneficiary?
After determining who you want as your beneficiary, you should specify them in the life insurance beneficiary designation form. If the designated beneficiary is a person, here are the details you will need:
- Full name
- Date of birth
- Address (Street address, city, state, and zip code)
- Phones number
- Social Security Number
Some beneficiary designations may require the mailing address of individual beneficiaries.
After populating the spaces, you will be required to specify the relationship between you and the beneficiary as well as the percentage of the benefit that should go to each beneficiary.
What does it mean to be a life insurance beneficiary?
To be a life insurance beneficiary means being that person or organization designated to get proceeds of a life insurance policy after the policyholder dies.
Normally, beneficiaries have no big responsibility other than collecting what was allotted to them.
What does a beneficiary have to do? And when?
A life insurance beneficiary is designated to receive death benefits upon the death of the policyholder. Even so, the beneficiary’s position does come with the requirement to understand certain legal roles and responsibilities.
As a beneficiary, you have the ability to force the executor to perform their duties to the estate and act reasonably when handling the estate property. Past that, you virtually have no responsibilities.
Depending on how the beneficiary relates to the insured, it might be their role to notify the insurance company when the insured passes away.
How to change a beneficiary
Changing a beneficiary of a Life insurance policy has always been a simple process. It is basically a simple matter that won’t alter any other aspects of your coverage policy.
All you need is to contact the insurer and submit a request to change a beneficiary. You will be given a change of beneficiary form, which you will be expected to fill out completely and accurately.
Be sure of the complete names of all your beneficiaries and their social security numbers so that you fill them correctly.
This information will be necessary for the insurance company to facilitate payment of benefits in the event of your death.
If you wish to have more than one beneficiary, then you need to clearly designate the proportions in which your death benefits should be subdivided amongst them.
In case you need assistance, contact your insurer’s service line or customer or visit an agent who can guide you appropriately.
Can I choose more than one beneficiary?
Probably, it’s your first time buying a life cover, and you have trust issues with your immediate family members. As much as you wish to put your family kin as a beneficiary, you may also wish to add someone else.
Choosing more than one beneficiary is legally allowed. In fact, you will be advised to choose a three-tier set of beneficiaries, that is, primary, secondary and final.
In case your primary beneficiary dies early, your benefits will be given to the second beneficiary.
The third beneficiary can receive the payout amount if the second one is unavailable. And if worse that you don’t have any other beneficiary still alive, then you have to change the beneficiary.
The main advantage of choosing several beneficiaries is that one may die earlier so that the other beneficiaries can give the payouts.
Can an executor change a life insurance beneficiary?
An executor is a person entitled to the will to distribute the wealth of an individual after the owner does. Beneficiaries should always remember that an executor has no right to override them.
An executor has no permission whatsoever to change life insurance beneficiaries or withhold their inheritance.
However, the will may give them that permission at times, but the permissions should be clearly stated and the reasons for such permission.
In addition to this, an executor should mind the fact that they have no authority to stray away from the terms stated in the will or have misconduct against their judiciary duty.
An executor has a few roles to play, but the major one is the role to pay off the defendants and any other liability that the deceased had.
If the deceased had bought a low coverage amount plan, the insurance company would have to pay the beneficiaries.
However, if there is an executor Is states in a will, it is his rightful obligation to distribute the deceased resources.
It is also expected by law for an executor to start paying off creditors before distributing money to the beneficiaries.
An executor has no right to interpret the contents of the will, whether they are ambiguous or clearly stated.
For example, if the deceased states that 50 percent of the coverage be given to his wife, and he was polygamous, then the executor has no right to decide which wife. Such a case should be handled in court.
Can the spouse change the beneficiary on a life insurance policy?
Changing a beneficiary of a life insurance policy is not a big deal; however, this does not mean that anyone can change the beneficiaries at any time.
As stated earlier, having a beneficiary changed involves the insured requesting and filling up forms. Therefore, changing a beneficiary only involves the company, the insured, and at times the existing beneficiary.
A spouse can’t alter anything on the life insurance policy you bought, not even a beneficiary. Most insurers only grant the owner of the policy the authority to change a beneficiary so that a spouse or ex-spouse does not interfere.
However, a policyholder can grant power of attorney(POA) to any qualified individual. If this power is granted to a spouse by chance, then the spouse can change beneficiaries but as a POA agent and not literally as a spouse.
Can you change your primary beneficiary at any time?
A primary beneficiary is that who is stated first by the policyholder. The primary beneficiary is different from other contingent beneficiaries.
Contingent beneficiaries are always stated as second or third, and they can only receive the benefits after the primary beneficiary. But this does not mean a primary beneficiary cannot be changed.
The policyholder can change a primary beneficiary anytime he desires to. However, most life insurance companies advise that a person selects an irrevocable beneficiary as a primary beneficiary.
In a case where a beneficiary is irrevocable, the policyholder has to notify them before changing a beneficiary. An irrevocable beneficiary must give consent before a policyholder changes beneficiary.
Who can change an irrevocable beneficiary?
An irrevocable beneficiary greatly affects the aspects of a life insurance policy, though indirectly. The policyholder is the only person who can remove an irrevocable beneficiary.
There is only one way to remove an irrevocable beneficiary from your policy benefit bearers list is by seeking their consent. An irrevocable policyholder must agree to your idea of letting them not benefit from your coverage.
This is the hardest and lengthy process in most cases because it involves lawyers. Additionally, some life insurance companies may not accept to let you remove an irrevocable beneficiary and add a new one.
Most parents will prefer to name their children as irrevocable beneficiaries to have easy access to coverage payouts. But this does not guarantee where marriages are involved.
For example, if you name the kids as beneficiaries and then divorce later, and get married elsewhere, accessing the kids may be a big challenge.
Similarly, if you name your spouse, they can still divorce you and even disagree with your idea of removing them from the list of beneficiaries.
Therefore, you should build enough trust in your spouse before naming them as beneficiaries to your hard-earned coverage payout.
In some states and insurance companies, an irrevocable policyholder can at some time have powers to change the contents of an insurance policy.
For example, you buy a term insurance policy and mention your secret lover or girlfriend as an irrevocable beneficiary but break up after some time.
Then you decide to cancel the policy; you will need to get the consent of that beneficiary. If they fail to agree, you will not be able to continue with your cancellation process.
Who should you never name as your beneficiary?
You are probably thinking of naming someone you have never met as a beneficiary to your life insurance policy payouts. Obviously, you have your reasons that shouldn’t be questioned.
There are some restrictions on who you should name as a beneficiary, and if you must name those restricted, you should be keen and very sure of your decisions.
You have all rights to name your minors as beneficiaries, but you have to attach the name of a trustee who will help the minors use the money.
In most cases, the trustee holds the payout amount until the kids attain a specified majority age. At this age, the minors can be allocated insurance benefits.
In the absence of a trustee, the money will be managed by a government body and disbursed to the minors later on. Similarly, if it is a huge amount, it will be withheld until the children mature.
You should not mention yourself as a beneficiary of life insurance policy benefits because they can only be paid out when you pass.
- People with disabilities:
Naming a disabled person as a beneficiary may be disadvantageous in some states.
For example, in Ontario, a person receiving funds from the government because they are disabled may be denied the funds in a situation where they get insurance benefits. Always speak to a lawyer before naming such a person as beneficiary.
Naming your estate is a bad thought, especially if you want your loved ones to use the payout for your funeral arrangements.
Most companies may delay disbursing payouts to an estate or a larger group of people. However, if you wish to prolong the payouts for some time, you can select your estate as a beneficiary.
You should, by all means, avoid naming your pets as beneficiaries. It actually makes no sense because pets may have less impact on your financial assets, no matter how close you are.
How to Complete the Beneficiary Change Form
To complete the form, make sure to follow these steps
- Request form
- Fill in details correctly and ensure that they are legible
- In case you make a mistake when filling the form, it is highly recommended to print another form and start filling again. Precisely, avoid using liquid paper as it may result in unneeded issues
- Sign the form. Keep in mind that any unsigned beneficiary change form is not considered legal.
- Send back the form to the insurers.
Are you stuck in the process of choosing a life insurance beneficiary? Hopefully, this post comprehensively covers the subject and helps you make an informed decision.