How to Choose Your Life Insurance Beneficiary

You probably bought a life insurance policy to protect your family members. 

Life insurance proceeds can provide monetary security when your loved ones need it most. This is especially true if you’re the breadwinner of the family. 

Whether you chose a term life insurance or whole life insurance policy, these proceeds may not go where you intend if you haven’t named your beneficiaries.

Even so, few people spend much time learning about how beneficiaries work.

Instead, they name a person or people based on instinct when they get the policy. 

What’s:

They don’t take the time to review and update their beneficiaries. 

Circumstances can change.

The money may not go to who you’d like it to when you die if you don’t update your beneficiaries, too. 

So how do you choose a life insurance beneficiary and how does it work? Here’s what you need to know.

What Is a Life Insurance Beneficiary?

A life insurance beneficiary is a person that receives the death benefit from your life insurance company when you die.

You have to fill out some initial paperwork when you buy a life insurance policy.

One of these forms lets you choose your life insurance beneficiaries.

Different Types of Beneficiaries You Can Name

There are several different types of beneficiaries you may choose.

The options you pick may vary depending on your wishes. 

Here are the four major categories you should consider when naming beneficiaries.

Primary beneficiary

Primary beneficiaries are the first people in line to receive a life insurance death benefit. You may have many primary beneficiaries and split the payout between them. 

The percentage split can be any way you choose.

For instance, you may make your spouse a primary beneficiary with 50% of the payout. 

Then, you could assign your brother as a primary beneficiary with 25% of the death benefit.

Finally, you could name your 25-year-old son as a primary beneficiary for the remaining 25% of the payout.

Contingent beneficiary

Another name for a contingent beneficiary is a secondary beneficiary, who will receive the payout if the primary beneficiary dies or otherwise cannot receive it.

As with primary beneficiaries, you can choose many contingent beneficiaries.

You can split up the benefit as long as it totals 100% across all contingent beneficiaries.

Importantly:

Contingent beneficiaries will not receive anything if a primary beneficiary accepts the payout. 

In our example above, your brother would receive 100% of the payout if your spouse and adult son die before you do. 

This assumes the death benefit is assigned per capita, or by person, as opposed to per stirpes, or by branch. In this case, your contingent beneficiaries would receive nothing. 

In order for the contingent beneficiaries to receive a payout, your spouse, adult son and brother must all be unable to receive the payout.

If you choose per stirpes, the death benefit will go to the descendants of each beneficiary. It won’t be split up among the remaining named beneficiaries. 

This means:

All primary beneficiaries must have no descendants and be unable to collect for a contingent beneficiary to receive a payout under per stirpes.

Revocable beneficiary

Primary and contingent beneficiaries are the two main types to determine who gets paid out.

That said, beneficiaries have another aspect to them. 

This secondary aspect determines whether you can change the beneficiary whenever you want.

A revocable beneficiary designation allows the life insurance policyholder to change their beneficiaries at any time.

They don’t have to notify anyone. Only the life insurance company must know of the change. 

This can be useful if you decide you no longer want the beneficiary to benefit from your life insurance death benefit.

Irrevocable beneficiary

Irrevocable beneficiaries are a different story.

When you name an irrevocable beneficiary, that person must approve of you removing them as a beneficiary from your policy. 

If the irrevocable beneficiary does not approve, you cannot change that person’s beneficiary designation.

How does adding multiple beneficiaries work?

Adding many beneficiaries shouldn’t be a problem. Most life insurance companies allow you to add several primary and contingent beneficiaries.

Make sure the allocations to your primary beneficiaries total 100%. The same goes for your contingent beneficiaries.

Then, make sure you choose whether you want the beneficiaries to be paid per capita or per stirpes. 

How to Add or Change a Beneficiary on Your Life Insurance Policy

You may have to mail in a form to add or change your beneficiaries. Other companies may allow you to make changes online.

The exact process depends on your particular life insurance company.

Certain information may be needed to add or change a beneficiary to your policy. You may have to provide some or all of the following information about the beneficiaries:

• Name
• Relationship to you
• Social Security Number
• Date of birth
• Address
• Phone number

Things to Consider When Choosing a Beneficiary

Choosing life insurance beneficiaries is serious business.

You should set a reminder to review your life insurance beneficiaries at least once per year.

Then, you can update them if needed.

Here are a few other things to consider.

Who will need the money?

Life insurance policies are usually taken out to financially protect your dependents. 

When the income you earn disappears after your death, many families struggle.

For this reason, it makes sense to consider who would need the money to survive.

In most cases:

You want your spouse to receive the payment.

They can use the money to continue living a normal life.

If you have children under the age of majority, the money can be used to continue raising them.

Who will responsibly manage the money?

Another consideration is who will responsibly manage the large life insurance payout.

The reality is:

Some people may not be well-suited to handle large sums of money. 

In this case, you may want to consider setting up a trust.

Then, you can name the trust as a beneficiary. A trust can define how and when the money can be allocated to the people who need it.

Do you live in a community property state?

If you’re married and live in one of the handful of community property states, there may be special rules regarding life insurance beneficiaries. 

Due to the way laws work in these states, your spouse may be entitled to a part of the death benefit. 

In particular:

These states often require a spouse to agree to name any life insurance beneficiaries other than the spouse.

If you live in a community property state, consult a professional. They can help you determine how this works in your state.

Naming children as beneficiaries

If you name a minor child as a beneficiary to a life insurance policy, you could run into problems. 

States don’t allow minors to receive life insurance payouts until they’re of age. This is usually 18 or 21, depending on the particular state.

If you name a minor as a beneficiary, courts may have to determine a guardian. The guardian may hold and manage the money until your child comes of age. 

In some cases, this could result in the money being wasted away. The child may never have a chance to use it.

Rather than letting the courts decide, you can take action.

You may name the people you’ve chosen to be your child’s legal guardians as the beneficiary. 

Alternatively, setting up a trust may work.

A trust could provide for the minor children. Naming the trust as the beneficiary of the life insurance policy may help make sure the money gets used as intended.

These cases can be complex. Ultimately, it depends on your estate planning and your state’s laws. Consult a professional to get advice for your specific situation.

Beneficiary vs. Your will

Choosing a beneficiary on your life insurance policy will supersede your will.

But this is only the case if one of your beneficiaries is alive when you die.

The payout goes to your estate if you have no living beneficiaries when you die.

In this case, a will could decide how the money from the life insurance is distributed.

Speak With an Expert but Be Wary of Conflicts of Interest

Whenever you’re making big financial decisions, it helps to talk to professionals that can help you with your specific situation. 

Each state has different laws and life insurance companies work in different ways.

Speaking to a life insurance agent or financial advisor can make sure things get done right.

Be wary when speaking to these professionals, though.

If they work based on commission from selling you policies, they may have a conflict of interest. Earning higher commissions may outweigh the desire to sell you the best product for your situation.

For this reason, speaking to a fiduciary financial advisor may be your best bet. They may charge you on an hourly or annual basis. The key is their advice is conflict-free if they don’t receive commissions. 

This way, you can make sure you have enough life insurance for your family’s needs.

You can also make beneficiary changes without risking being sold more unnecessary life insurance.