Insights:

A life insurance beneficiary is who or what receives the death benefits after the policy owner dies.

Life insurance is an important part of sound financial planning. Life insurance provides beneficiaries with funds for education, income, charities, and other purposes.

According to the American Council of Life Insurers, life insurance companies paid out $87 billion in death benefits in 2020 to beneficiaries.

When you buy life insurance, you usually have specific people in mind as beneficiaries that you want to protect. It looks pretty simple on the life insurance application, but it’s a big decision, and it’s not hard to make mistakes.

What is a life insurance beneficiary?

Beneficiaries are the reason for life insurance. Beneficiaries receive proceeds from the policy when the insured person dies. 

The policy owner names the beneficiary on the life insurance application. Beneficiaries can be:

  • Family members
  • Business partners
  • Charities
  • Friends
  • A company
  • A trust
  • A class like all of your children, grandchildren, even future children

Beneficiary designations can be primary or contingent. Here are the differences between primary and contingent:

  • A primary beneficiary receives the proceeds if they’re alive. 
  • A contingent beneficiary receives the proceeds if the primary beneficiary has died.

Beneficiaries are generally revocable, so the policy owner can change a revocable beneficiary at any time by notifying the insurance company.

In some cases, a policy owner may designate a beneficiary as irrevocable. An irrevocable beneficiary designation can’t be changed without the beneficiary’s consent. In some states, the life insurance company has to notify an irrevocable beneficiary if the policy has been canceled.

Key Takeaways

  • You can name anyone as your policy’s beneficiary, including yourself, family members, charities, and a class of people, such as your children or grandchildren.
  • Primary beneficiaries receive the death benefits. Contingent beneficiaries receive the money if a primary beneficiary or beneficiaries are no longer alive.
  • You can easily change beneficiaries unless they’re irrevocable beneficiaries. In that case, you likely need their OK to get removed from a policy.
  • A policy owner can name a trust as a life insurance beneficiary, but that potentially has negative consequences, including tax issues.

How life insurance beneficiaries work

When you buy life insurance, you want to ensure that the beneficiaries receive the money as you intended.

Andy Bucklee, senior vice president and head of Life & Executive Benefits Distribution for Lincoln Financial Group, suggests reviewing your beneficiaries on your policy annually and updating the information as needed.

 “Carefully doing so will help ensure the policy benefits go to whom you intended, especially considering that your will doesn’t always control who gets your death benefit,” Bucklee says.

It’s essential to provide the beneficiaries’ contact information and Social Security Number. Sometimes, the owner doesn’t tell the beneficiary about the life insurance, and they never claim the policy’s death benefit.

In 2018, the insurance commissioner of California announced that life insurance companies paid out $10 billion of life death benefits unclaimed by beneficiaries as a result of a multi-state investigation.

It’s also wise to name a contingent beneficiary in case your primary beneficiary dies before you.

“Two backups should be named for every person named in a life insurance policy as a beneficiary,” Bucklee advises.

If there’s no contingent beneficiary, the deceased primary beneficiary’s share goes to any remaining beneficiaries or to the estate if there are none. Beneficiaries receive life insurance proceeds income tax free.

Naming children as beneficiaries

If your beneficiaries are minors, be careful how you designate them, including appointing a legal guardian.

“Policyowners should also avoid naming minors as outright beneficiaries,”  Bucklee says. “An insurance company will not knowingly pay insurance proceeds outright to minor children and therefore if a minor is named as a beneficiary, a guardian or custodian may have to be appointed by a court at the expense of the children.”

Instead, Bucklee suggests setting up a trust for minor children and naming the trust as the recipient of the life insurance proceeds.

“This can help avoid many of the legal restrictions imposed on outright distributions and is a much safer and surer way to provide financial security for those who can’t or don’t want to handle large sums of money or other assets,” Bucklee says.

How to change a beneficiary on life insurance policy

Changing a revocable beneficiary is usually simple. Life insurance companies often include beneficiary forms on their websites. If you have an agent, you can call them for the form or the company’s customer service department.

You need to gather information to fill out the form, such as:

  • The policy number
  • The Social Security Number
  • Current contact information for each beneficiary

The form will require the owner’s signature as well as a witness.

The form will have instructions for filling out and submitting the form. The life insurance company will update the policy and send back a confirmation of the change. No beneficiaries are notified of the changes.

If your beneficiary is irrevocable, they have to give their consent to the change by signing the form.

Can you remove your spouse as a beneficiary?

As the policy owner, you can change the beneficiary anytime — even if the person is a spouse. The only exception is if the beneficiary is irrevocable. Irrevocable beneficiaries have to consent to the change in writing.

How is the life insurance beneficiary changed by divorce?

Life insurance is often part of a divorce settlement. The court may order a new spouse to maintain coverage for the benefit of the other ex-spouse and/or children. The court usually specifies how the beneficiaries are named and how long the coverage has to be maintained.

Frequently Asked Questions

How do you find out if you’re the beneficiary of a life insurance policy?

If the insured is alive, you would only know that you’re a beneficiary if the policy owner told you. If the insured has passed away, the insurance company will make every effort to locate the beneficiaries.

The National Association of Insurance Commissioners (NAIC) has a life insurance policy locator service available to help you search for a life insurance or annuity contract of a deceased family member.

Who can change the beneficiary on a life insurance policy?

Only the policy owner or a court can change or remove a beneficiary. In a beneficiary dispute, the insurance company will turn the matter over to a state court to decide.

An annual review of your life insurance policy is a smart way to make sure the right people receive the death benefit.

What would be the disadvantage to naming a trust as beneficiary of a life insurance policy?

There are two potential disadvantages to naming a trust as a life insurance beneficiary.

While the trust will receive the death benefit income tax free, there may be future tax consequences to the beneficiaries of the trust. Also, consider that maintaining a trust has a cost, which can add up over time.

You should consult a professional advisor before naming a trust as a life insurance beneficiary.

What is a contingent beneficiary?

Contingent beneficiaries receive the policy death benefit if a primary beneficiary is no longer alive. Contingent beneficiaries can be named. Alternatively, the primary beneficiaries can be named per stirpes or per capita.

A per stirpes designation means the children of a deceased primary beneficiary split the primary beneficiary’s share. A per capita designation means the proceeds are divided equally by the surviving beneficiaries.

Here’s how it works. The policy owner John Smith names each of his two adult children Jack and Jill equally as primary beneficiaries of a $300,000 life insurance policy per stirpes. Jack and Jill each have two children. If Jack dies before John, his children will share $150,000 when John dies. If Jack and Jill were named as primary beneficiaries per capita, Jill would receive the entire $300,000. If there is no contingent or per stirpes designation, the death benefit will be distributed per capita.

How do community property states affect a death benefit?

Nine states are community property states, which means all property of a married person is considered community property, so it’s owned jointly between spouses. Couples must split all of their assets acquired during the marriage equally.

Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

How does community property impact life insurance? If a spouse uses community property to pay for life insurance, the spouse has a right to a portion of the life insurance proceeds. How much they’re eligible for depends on the policy.

An entire term life insurance policy is considered community property, so the spouse has the right to 50% of the life insurance benefits. With permanent life insurance policies like whole life and universal life, the death benefit is prorated according to the percentage of premiums paid with the community property.