Life insurance is designed to help financially protect the people you care about if something happens to you. That’s why choosing who will benefit from your policy is an important part of the life insurance process.
Here’s what you need to know about life insurance beneficiaries.
What is a life insurance beneficiary?
A beneficiary is the person or entity who receives the death benefit if you die while your life insurance policy is still active. The payout can be used to pay off your remaining debts and funeral expenses, but it can also help replace income, cover loved ones’ daily expenses and other financial needs, and leave a legacy.
Beneficiaries are often spouses, domestic partners, children, parents, or business partners. They can also be organizations, like charities or trusts. If you have several people you want to protect financially, you can choose multiple beneficiaries and arrange to divide your death benefit between them.
When you’re purchasing life insurance, the provider will ask you to pick a beneficiary or beneficiaries as part of the application process. Make sure to decide ahead of time who you’re going to name.
Different types of beneficiaries
There are two different kinds of beneficiaries: primary and secondary, or contingent, beneficiaries. Basically, these designations spell out when someone would receive your death benefit.
Primary beneficiary
A primary beneficiary refers to the person or organization who you want to receive the payout first. You can have one or more primary beneficiaries. If you have more than one primary beneficiary, you can choose what percentage of the death benefit to allocate to each.
Secondary beneficiary
Secondary beneficiaries would receive the death benefit only if your primary beneficiaries die, can’t be located, or are unable to receive the payout for some reason. As with primary beneficiaries, you can assign one or more contingent beneficiaries.
For example, you could name your spouse as your primary beneficiary and your two adult children as your secondary beneficiaries to help ensure that your payout would go to one of them after your death.
A primary beneficiary refers to the person or organization who you want to receive the payout first. Secondary beneficiaries, on the other hand, would receive the death benefit only if your primary beneficiaries die, can’t be located, or are unable to receive the payout for some reason.
For example, you could name your spouse as your primary beneficiary and your child as your secondary beneficiary to help ensure that your payout would go to one of them after your death. You can also name multiple primary and contingent beneficiaries.
What happens if you don’t choose a beneficiary for life insurance?
Most insurance companies ask you to choose a beneficiary when you buy a policy. But if there are no beneficiaries still living when you die, the death benefit cash payout will become part of your estate, which will likely be distributed by your local probate court.
If you name a beneficiary but they aren’t given the correct information or can’t be found after you die, your provider may turn the payout over to the state’s unclaimed property program.
This is why it’s crucial to let your potential beneficiary know about the policy ahead of time, so they know what to expect and who to contact.
7 Tips to choose the right life insurance beneficiary
Here are seven tips to keep in mind before and after you choose a life insurance beneficiary for your policy.
Tip #1: Ask yourself who needs the benefit the most.
Choosing a beneficiary ensures that your money goes exactly where you want it to. It also prevents your loved ones from having to wait for your will to be executed so they can receive a payout.
Before you make your choice, consider why you’re buying a policy in the first place. People usually purchase life insurance to protect those they love so there will be a safety net in place if something happens. Think about the people in your life and how they would be affected financially if you die.
If you’re married, for example, your spouse is the obvious choice. The payout from term life insurance or permanent life insurance can help take care of day-to-day expenses, replace your income, and cover any debts you leave behind. Have kids together? It can help cover extra expenses, like college tuition.
If you’ve been helping older parents take care of their finances or are responsible for the health of a disabled relative, the payout could help them maintain their quality of life after you’re gone. This is a scenario where you can also pick multiple beneficiaries and divide the payout among them.
And if you’re a single parent, think about who you’d want to take charge of your children if you die. Your payout would support both the guardian’s and your children’s needs, pay off any lingering debts, and even leave them with savings for future expenses.
Tip #2: Know the rules before you choose.
A couple of things to consider when choosing a beneficiary:
- Their age. Minors can’t receive the money directly until they become adults. If you name a young child or grandchild, you’ll likely want to consider setting up a trust or appoint a guardian to manage the money until they’re grown.
- State laws. Some states may have different rules about who you can name. For example, in community property states, if you’re married and plan to name a beneficiary other than your spouse, your partner may still have a legal claim to part of the benefit.
Tip #3: Remember you have options if you’re single.
A spouse or partner is a logical first choice for many policyholders, but there are options to choose a life insurance beneficiary if you’re single, too.
If you have permanent or term life insurance to cover your final expenses or existing debt, you might consider naming a parent, sibling, or a trusted friend to receive the money once you’re gone. A parent or both your parents would make sense if they have co-signed a loan with you, lent you money, or helped you cover college expenses.
If you’re single or divorced with kids, you can name your child or children as beneficiaries. If they’re minors, consider setting up a trust or see Tip #4 for other options.
Tip #4: The ideal choice isn’t always a person.
Assigning a trust as your beneficiary can be a good choice for you, especially if you want to:
- Name a minor or disabled dependent and ensure there will be someone to distribute payout funds to them as needed.
- Make sure the insurance payout is used in specific ways (such as for daily care) or saved for a certain time.
- Avoid disagreements in case of a divorce or other potential issues.
- Create a backup plan in case your spouse or family members die.
Talk to an attorney about how to best set up a trust.
Tip #5: Consider multiple beneficiaries.
In some cases, you may want to name multiple primary beneficiaries (like both your children) and designate how much goes to each. A secondary beneficiary can also be a smart option in case your primary beneficiary dies first.
People typically divide their life insurance payouts in one of two ways:
- Per capita: This method splits the death benefit equally between all named living beneficiaries, like your spouse, children, family members, or other individuals.
- Per stirpes: With this approach, your life insurance payout will be divided by generation, so that members of each generation get an equal portion.
It’s important to review your primary and secondary beneficiary designations regularly, in case a beneficiary dies or other changes happen, and update them with your life insurance company.
Tip #6: Keep your beneficiary choice up to date.
Your ideal beneficiary or beneficiaries may change over time, depending on your circumstances and family situation. It’s important to keep that information updated so your provider knows what to do if you die.
A few key times in your life when your choice of beneficiary might change:
- When you get married or divorced
- When you have kids (or more kids)
- When you become responsible for other dependents, like aging parents or relatives
- When your kids become financially independent
- When a family member or dependent dies
If you don’t update your beneficiary designation, the payout could go to your previous choice. For example, if you get married and one of your parents was the beneficiary while you were single, they would still get the death benefit if you die unless you name your spouse instead.
Check to make sure that your beneficiary choice is updated every time you review your coverage, at least once a year or during any major life changes.
Tip #7: Make sure your will matches your life insurance policy.
Changing your will is not the same as changing your life insurance policy. Your policy is a separate legal contract from your will, so the policy should pay the beneficiary no matter what your will says. For example, if your current spouse is the beneficiary of your will, but your life insurance policy has your children’s name, the death benefit will go to your children.
Make sure your current situation is reflected in both your will and life insurance plan. Ideally, you should take the time to update your policy whenever you need to make a change to your will, and vice versa.
Fidelity Life is here to help you understand life insurance beneficiaries.
At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible.
