What is a life insurance beneficiary?
The life insurance beneficiary is the person or group legally designated to receive the death benefit of your life insurance after you die. The death benefit is paid directly to the beneficiary, so whoever is named on the policy will receive it in full, unless you have designated that it be shared among multiple beneficiaries.
A life insurance beneficiary doesn't have to be a person. It can also be a trust or another organization, such as a charity.
How does naming beneficiaries work?
The policy owner names the beneficiary when the policy is taken out, and can change that beneficiary at any point, unless it is an irrevocable beneficiary, which requires the signature of the current beneficiary to change. This is most common when the life insurance policy is part of a divorce decree and the beneficiary is court-ordered.
Who can you name as your life insurance beneficiary?
You can name a person or multiple people, a trust, an organization such as a charity or your estate as the beneficiary of your life insurance.
Individuals
This one is the most straightforward. Naming an individual beneficiary, like a child or a spouse, keeps things easy for you as the policyholder and makes it easy for the insurance company to pay out the death benefit after you pass.
Businesses/charities
You don’t have to name a person, or group of people, as the beneficiary. You can name an organization as the beneficiary. That could be a business, charity, or even your former college or high school. In that instance, the death benefit would go to the organization that you’ve chosen, and then they would be able to use the funds as they see fit.
Trusts
By naming a trust as the beneficiary, you put the money under the care of a trustee who then can disburse it to whomever you desire. This additional person is a safeguard in the process, especially if you have a minor child as the primary beneficiary.
Estates
You can have your life insurance proceeds go to your estate, but this means the money will go through probate, be subject to estate taxes, and be available for payments to creditors. If your beneficiary can’t collect on your policy for any reason, the proceeds will go to your estate.
It’s important to talk with people you name as a beneficiary. Most people name their spouse (if they have one) as the beneficiary on their life insurance, but other family members and even friends could also be named. It’s important to update your beneficiary whenever things change to avoid sending the proceeds to probate.
Who shouldn't you name as a beneficiary?
Although you can generally name anyone you want as your beneficiary, it's important to think carefully before naming minor children, as they will not be able to directly access the money after your death. Setting up a trust is the best way to ensure they receive the money.
Kristen Gryglik, a life insurance agent with Comparion Insurance Agency in Boston, says that while a policyholder is entirely within their rights to name their child as a beneficiary, she always advises her clients against naming a dependent child.
“The money gets tied up anyways,” Gryglik says. “If you have life insurance for $500,000 they’re not going to cut a check to a six-year-old. It’s going to have to go through a process anyway. First and foremost, you should have a will set up and have someone named as the guardian of your children. Usually, it’s advised to have it in a trust, and that helps avoid any complications.”
Primary vs. secondary beneficiaries
The difference between a primary and secondary (contingent) beneficiary is the order in which the money is disbursed. The primary person will be paid as long as they are still alive and able to collect. If they are not, the secondary, or contingent, beneficiary will receive the money instead.
“[The] primary would be the first person to get the money, and a secondary would be if something happened to the primary beneficiary,” Gryglik says. “You can have more than one primary. If you have four kids, and you want each of them to get 25%, you can name them that way. A lot of people will have a spouse as the primary and secondary would be the kids. You can definitely have more than one primary and one secondary [beneficiary].”
An example of this would be a married couple with adult children. If, for example, Spouse A has the policy in their name, they could name Spouse B as the primary beneficiary and the children as secondary beneficiaries. So, if the married couple passes simultaneously, the money will have a direct avenue to get to their children.
