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 gets paid out directly to the beneficiary, so whoever is named on the policy will get the death benefit in full.
How does naming beneficiaries work?
Whoever holds the policy can name a beneficiary through their insurance provider. Someone must be named as the beneficiary. You can’t assume that a policy will automatically pay out the death benefit to a loved one or child just because you are related to them. You must formally name someone as the beneficiary on your policy to be certain that the money will get to them.
Types of life insurance beneficiaries
Even though most people will name a single person as the beneficiary of their life insurance policy, there are multiple different types of beneficiaries.
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.
Life insurance beneficiary rules
The rules about who you can name as a life insurance beneficiary are relatively lax. Since you’re in charge of your own policy, you can name almost anyone as a beneficiary. The main exception is underage children.
Kristen Gryglik, a life insurance agent with Comparion Insurance Agency in Boston, says that while a policyholder is completely in their right 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.”
Other than the issue of naming an underage child as the beneficiary, there are few restrictions on who you can name as a beneficiary.
The policyholder can change the beneficiary on a life insurance policy at any time for any reason.
Primary vs. secondary beneficiaries.
The difference between a primary and secondary (contingent) beneficiary is the order in which the money is disbursed.
“[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.
Another term for a secondary beneficiary is a “contingent” beneficiary. If you ever hear that term, know that it is synonymous with “secondary.”
