Choosing Life Insurance Beneficiaries (2024 Guide)

A life insurance beneficiary is the person or entity a policy owner chooses to receive the payment from a life insurance policy upon the insured person’s death. Beneficiaries can be an individual — such as a family member — an organization, a trust or a charitable organization.

As a beneficiary, your role is only to inherit your intended portion of a life insurance policy. There is typically no need for legal steps apart from properly identifying yourself and signing a release to claim the death benefit. Upon the death of the insured person, the life insurance payout gets paid to the named beneficiary, avoiding probate court, and may provide a lump-sum benefit in as quickly as a few days from filing the death claim.

There are two types of beneficiaries in a life insurance policy:

• Primary beneficiary: The person, people or entity that receives the death benefit payment upon the insured person’s death.
• Contingent beneficiary: The person, people or entity that replaces a primary designated beneficiary if one of the primary beneficiaries predeceases the insured person.

There are also two life insurance beneficiary designations for primary and conditional beneficiaries:

• Revocable beneficiary: A beneficiary that can be changed by the policyholder at any time prior to the insured person’s death.
• Irrevocable beneficiary: A beneficiary whom the policyholder can’t change without the beneficiary’s consent.

The irrevocable beneficiary designation is an important designation because it can protect the beneficiary legally from the policy owner changing the beneficiary without their knowledge. Be careful when assigning an irrevocable beneficiary; it can be hard to reverse.

The reason you take out a life insurance policy is to provide financial assistance to beneficiaries after the insured person either becomes disabled and unable to work or passes away. Still, choosing your beneficiaries isn’t always a straightforward task.

When choosing life insurance policy beneficiaries, first take into account personal circumstances and relationships with potential recipients of the death benefit payment. Take an objective view of possible heirs when making this decision as emotions can cloud sound judgment in such matters.

Additionally, it’s worth talking to a financial advisor before assigning minor children as beneficiaries of a life insurance policy. Generally, a legal guardian will have to act as the custodian of the death benefit funds. If you want the policy to support a special needs child, you should consult with a financial planner who specializes in special needs to determine the best way to provide financial support.

It’s also worth evaluating each potential beneficiary’s financial needs and obligations before deciding on who will receive the death benefit payment. You can do this by assessing their personal finance habits to determine whether they’d be able to manage large sums of money responsibly without risking their long-term financial security.

Keep life insurance policies up-to-date with beneficiary changes as your circumstances in life change over time. This could include life events — marriage, divorce or the birth of a child — that may impact who should receive the death benefit payment from the policy.

Before locking in a life insurance policy, consider whether you’d prefer that death benefits be paid per capita and per stirpes. Here’s a quick look at the differences.

Per Capita

Under the per capita method, death benefits are paid only to those who are still living and named as beneficiaries in the policy.

Let’s take Jessica, who has two siblings and is married with three children. She and her siblings are beneficiaries of one of their parents’ life insurance policies. If Jessica predeceases her parents, her two siblings will split the death benefit equally. Jessica’s family would not receive any portion of the death benefit.

Per Stirpes

Under the per stirpes method, if the beneficiary predeceases the insured person, the lineal descendants of the beneficiary receive the benefit in the beneficiary’s stead.

Going back to our example, if Jessica passed away before her parents and there were no contingent beneficiaries, a death benefit paid per stirpes would pay one-third of the benefit to each of Jessica’s siblings, with the final third assigned to Jessica’s children.

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The beneficiary selection process comprises four steps. At each step, it’s important that you communicate with your loved ones about the structure of your planning to avoid surprises at what will be a difficult time for them.

Step 1: Identify Who Should Benefit From Your Life Insurance Proceeds

This may seem like an easy step, but your beneficiaries may not always be the only people you want to benefit from your life insurance proceeds. For example, you may want your death benefit to go toward your kids, but they can’t be named due to their age. Likewise, it may not be prudent to name a child with special needs who receives government assistance as a beneficiary without using a trust.

Step 2: Evaluate Potential Beneficiaries

You will need to consider who is financially responsible, trustworthy and capable of managing the proceeds of the policy. The primary beneficiary should be someone you trust to respect your wishes and handle the associated financial obligations. It is important to communicate your wishes with the people you are considering as beneficiaries prior to selecting them.

Step 3: Name Multiple Beneficiaries

It is possible to name multiple individuals or entities and assign them percentages of the death benefit payment from the policy. For example, you could designate 50% of the death benefit payment to go to a current or former spouse, 25% to a child, 15% to another family member or friend, and 10% to a charitable organization or a religious institution.

Step 4: Identify Contingent Beneficiaries

If a primary beneficiary dies before the policy owner, a contingent beneficiary, also called a secondary beneficiary, replaces them. The same factors used when evaluating a primary beneficiary should be considered when evaluating potential contingent beneficiaries.

Additionally, it is important for policies with multiple beneficiaries that all of these individuals are informed that they have been named as successors in order for them to remain aware of their roles and responsibilities.

• Not researching the tax implications of gifting a life insurance policy. Talk to a tax adviser about the tax consequences of certain transactions involving life insurance policies. There are some circumstances, particularly when the policyholder and the insured person aren’t the same, when the payment of a death benefit is considered a taxable event. Also, estate taxes may apply.
• Naming minors as direct beneficiaries without appointing a guardian or creating a trust. Minors cannot enter into contracts or open bank accounts on their own, so if you directly name a child as a beneficiary, state law may require oversight and control on this account until they reach the age of majority.
• Not updating beneficiary designations with life changes. This includes marriage, divorce and the birth of children. The longer you go without updating your beneficiary, the more likely your death benefits won’t help the people who need them.
• Failing to name contingent beneficiaries in case a primary beneficiary predeceases you. If your primary beneficiaries predecease you, and you do not name contingent beneficiaries before you pass away, your death benefit may go through probate. This can make it extremely difficult for your next of kin to make a claim for the death benefit.
• Making assumptions about who will receive the death benefit payment from your policy rather than clearly communicating your wishes. What you want to happen for your minor children in the event of your death might not happen if you haven’t communicated your wishes through a will, trust or some other formal communication. As we all know, never assume others know what you’re expecting.
• Giving too much weight to emotions when selecting beneficiaries instead of taking an objective view. Sometimes doing what is fair versus what is right can be difficult to sort through. Try taking an objective look at what you want to accomplish with your death benefit.
• Not taking into account any life insurance beneficiary rules the life insurance company requires on who can receive the life insurance death benefit payment. There needs to be a connection between you and your beneficiary and this is where we see most rules focused on by a life insurance company. Naming people who have no financial loss or insurable interest as beneficiaries could cause the death benefit to become taxable.

Choosing beneficiaries for your life insurance policy is a critical decision because it determines who receives the death benefit payment from your policy. Take the time to speak with potential beneficiaries before making this decision. Ensure they are financially responsible and have the capability to manage the proceeds of the policy according to your wishes.

You may also want to name multiple beneficiaries and assign them percentages of the death benefit payment. Also, select a contingent beneficiary in case one of your primary beneficiaries predeceases you. This will allow someone else to become eligible for receiving the death benefit without the need to update the beneficiaries list as frequently.

Lastly, avoid common mistakes such as not researching tax implications or failing to update beneficiary designations with life changes; these mistakes can prevent your intended beneficiaries from receiving their due share of the death benefit upon your passing. If you are uncertain about how to decide what is best for your situation, this is where a trusted financial advisor or life insurance agent can add significant value. An insurance professional can help you navigate the selection process, explain the pros and cons of certain decisions, and coordinate with your tax and legal professionals.