What to consider when naming life insurance beneficiaries

Article

The idea behind life insurance is to provide money to your loved ones to help protect them financially after you’re gone. But in order to make sure that happens the way you want it to, it’s important to think about who you want to receive the payout (or death benefit) from your life insurance policy. That person is called your beneficiary.

December 20, 2023

6 min read

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Do I have to name a life beneficiary?

Sometimes, you may be able to take out a life insurance policy without naming (also referred to as “designating”) your beneficiary. But if you die without a naming a beneficiary, the cash payout from your policy automatically becomes part of your “estate” (all the money, property and belongings you leave behind). Any money paid to your estate has to go through probate, a legal process that costs money and slows down how quickly the money gets to loved ones. Also, in some states, money paid to your estate can be claimed by the people you owe money to (your “creditors”). Because of these things, it’s almost always a smart idea to name a beneficiary.

Multiple beneficiaries

Maybe you’d like to have your life insurance payout go to two or more people. A lot of people do this. You can name several people as your beneficiaries if you’d like. However, keep in mind that, if you name more than one beneficiary, you then have to decide how you want the money split up between them. Usually, the best way to divide up the money is by percentage. (For example: 50%/50%, 65%/35%, 50%/25%/25%, etc.)

Who can I name as a beneficiary?

A lot of people name a close relative—like a spouse, brother or sister, or child—as a beneficiary. You can also choose a more distant relative or a friend. If you want to designate a friend as your beneficiary, be sure to check with your insurance company or directly with your state. In some states, beneficiaries who aren’t relatives need to have what’s called an “insurable interest in your life” at the time you take out the policy. What that means is that they could suffer financially if you were to die. (One example would be if you and a friend owned a home together.)

Primary and contingent beneficiaries

Primary beneficiaries

The person you want to receive the payout from your policy—your first choice—is called the “primary beneficiary.” If that person is your only beneficiary, you will also want to designate a secondary beneficiary (also known as a “contingent” beneficiary).

Contingent beneficiaries

The secondary beneficiary gets your payout in the event both you and your primary beneficiary die at the same time—say, together in an accident. Without a contingent beneficiary, your payout would likely go to your estate (see above), not directly to someone you would want to have it.

How to name a beneficiary

The application you fill out to apply for a life insurance policy will have an area where you are asked to write the name of your beneficiary (or “names” if you want more than one beneficiary). After the insurance company approves your policy and it goes into effect, your beneficiary is set. You don’t have to do anything more unless or until you want to change your beneficiary.

When to change a beneficiary

Why would you change or add beneficiaries? Usually, it happens because your life changes in a major way due to your marriage or divorce, the birth of a child, etc. In some cases, those big changes are also a good reason to think about changing the type of life insurance you have and how much coverage you need.

When you consider changing beneficiaries, remember that there are two kinds. “Revocable” beneficiaries can be changed any time you wish. “Irrevocable” beneficiaries can’t be changed except under special circumstances (for example, if the beneficiary dies before the policy owner). If you think you might want or need to change your beneficiaries at some time, check with your insurance company to make sure the policy you purchase allows you to make beneficiary changes.

One additional note: In some cases, your right to change a beneficiary may be limited by a divorce decree or settlement agreement. If you are divorced, you may be able to change your beneficiary even if the beneficiary is “irrevocable.” However, in other cases, you may not be allowed to change your beneficiary or you may be required to name a divorced spouse or child as an irrevocable beneficiary . If this is a concern for you, be sure to read your insurance policy carefully. You may also want to check with your insurance company or lawyer before changing a beneficiary or taking out a new life insurance policy.

How to change a beneficiary

If you’re ready to change your beneficiary, ask your insurance company for what is known as a “beneficiary designation form.” Once you fill that out and it is processed by the insurance company, your new beneficiary automatically takes effect.

Can you name a minor as your beneficiary?

You are allowed to name a child who is young enough to be considered a minor by your state as your beneficiary. However, you should also appoint an adult guardian for the child in your will or use a trust. (You’ll probably want to get a lawyer’s help with those.) If you have a minor beneficiary but no guardian, the probate court will appoint a guardian for you. In states that have adopted something called the Uniform Transfers to Minors Act, it’s possible to get around the need for a designated guardian by creating a “custodial account” that will hold the money for the child until he or she reaches the legal age of consent. Check with your insurance company or the state to see if that is an option where you live.

Other considerations when designating beneficiaries

Here are few cautions when thinking about beneficiaries. Don’t make the mistake of thinking you can use a will to change your beneficiary. The beneficiary you designated in your policy will be the one considered valid after your death. Make sure you make any beneficiary changes to your policy with a change-of-beneficiary form from your insurance company.

If you are declared legally incompetent, you cannot name a beneficiary or change one. The test that is applied to determine competency is similar to the one for making any legal contract. Basically, it will determine if you have the capacity to understand your actions.

Children who are minors according to the law of their state can have life insurance policies. However, in some states, they can only list a certain “class” of people—usually parents, grandparents, brothers or sisters—as beneficiaries. The child’s parents or legal guardians also have to sign the child’s application for life insurance. Ask the company you’re getting your policy from for more details.