When you purchase a life insurance policy, the goal of getting covered is to provide for people you care about after you’re gone. Your life insurance will pay out a death benefit if you die while you’re covered by the policy. The amount of the death benefit could range from a few thousand dollars to $1 million or more, depending on how much coverage you choose to buy.
You’ll need to make a decision when you buy your policy about who will receive the life insurance proceeds if something happens to you. The person you select to receive the money is called the beneficiary. It’s imperative you understand the rules for beneficiary designations because that beneficiary could receive a small fortune if you pass away.
This guide will help you understand everything you need to know about life insurance beneficiaries.
On this page:
- What is a Life Insurance Beneficiary?
- What is a Secondary Life Insurance Beneficiary?
- Can I Change My Life Insurance Beneficiary?
- Things to Keep in Mind When Choosing a Life Insurance Beneficiary
What is a Life Insurance Beneficiary?
A life insurance beneficiary is simply a person that you, as the policy owner, designates to receive the death benefits of your policy if you pass away. When you buy coverage, you must choose a beneficiary so the life insurance company has someone to give the benefits to if you die.
You aren’t restricted in who you pick to be your beneficiary. Many people pick their family members but your beneficiary doesn’t necessarily have to be related to you. You could pick business partners if you want to make sure they have the money to buy out your share of the company after your death or you could make a friend a beneficiary.
You can also have multiple beneficiaries of a policy if you’d like. For example, you may have five children who are each made a beneficiary on your policy.
If you choose multiple beneficiaries, you can specify how you want the proceeds of the death benefit to be distributed. You could give an equal share of the death benefit to each beneficiary or you could specify that one beneficiary receives 50 percent of the policy’s benefit and the other beneficiaries split the remaining 50 percent.
>> Read More: How Life Insurance Works
What is a Secondary Life Insurance Beneficiary?
When you get covered, you’ll be asked not just to pick a primary life insurance beneficiary, you’ll also need to pick a secondary beneficiary, also called a contingent beneficiary. Secondary beneficiaries will collect the death benefit if your primary beneficiary can’t or the primary beneficiary dies.
For example, if your spouse is your primary beneficiary but you both die in a car accident, your spouse can’t collect the death benefit because he or she is also deceased. Your secondary beneficiary would collect in this case.
You also have the option to name multiple secondary beneficiaries and specify how funds should be distributed to them if your primary beneficiary is unavailable. And, you can choose anyone for a secondary beneficiary, just as you can for your primary beneficiary. In fact, many people name charitable organizations as a secondary beneficiary so they can give to causes they care about.
There is a lot of flexibility in selecting a secondary beneficiary so you can make sure the death benefit on the policy you pay for goes to the right people or organizations if your primary beneficiaries aren’t able to collect the funds.
Can I Change My Life Insurance Beneficiary?
Once you have chosen your life insurance beneficiary, you aren’t locked into keeping that person as your beneficiary for the rest of your life. In fact, as long as you are the sole policyholder, you can change your beneficiary whenever you want to. You could add beneficiaries if you decide you want to have multiple beneficiaries, or you could remove someone as a beneficiary if you’d prefer. You can change your secondary beneficiary at will.
Changing your beneficiary typically involves contacting your life insurance provider or your insurance agent and filling out some simple forms to alter the named beneficiary. But, it is very important to go through this formal process if you need to modify who will receive your death benefit. For example, if you get divorced, if you have another child, if your children become adults, or if one of your beneficiaries passes away, you’ll want to take action to change who your beneficiary is.
You should also know that you must actually take action with your insurer to make a change. If you’ve named your ex as your beneficiary on your policy, it doesn’t matter if you specify in your will that your new spouse is supposed to inherit all of your assets. If your ex is still listed on the insurance policy as the beneficiary, your ex would be the one who gets the death benefit.
To make sure the right people receive the death benefit from your insurer, you should take action as soon as possible to notify your insurer when you need to update your chosen beneficiary.
Things to Keep in Mind When Choosing a Life Insurance Beneficiary
The choice of who should receive your death benefit is a very personal one. You’ll need to consider the people financially depending on you and to whom you would want or need to provide financial support to when you decide who should be named as your original beneficiary or secondary beneficiary.
And, don’t forget people who depend upon you for services if you want to be sure they are taken care of. If you have aging parents who you help out, for example, you may want to ensure they receive some of your death benefits if they will end up having to pay someone to do the things you’re currently helping with.
You should also consider whether there are any special issues that arise due to your chosen beneficiary.
For example, children can’t manage the money from your policy if they’re underage when the death benefit would be paid out to them, so a legal guardian or financial advisor may be appointed for the money if you’ve named minor children as the beneficiaries. If you’d rather choose who manages the money and what it is used for, you could instead create a trust that you name as the beneficiary. The trust could be created to benefit your children and you could select a trustee to use the funds in the trust in an appropriate way to care for your children.
There are also different considerations in a situation where there are irrevocable beneficiaries and there is the Uniform Transfers to Minors Act that needs to be considered when designating a minor as a life insurance beneficiary.
If you want your death benefit to go to a disabled loved one, on the other hand, directly transferring money to that person could cause a loss of means-tested benefits such as Medicaid or Supplemental Security Income. Plus, the disabled person might not be able to manage the money. This is a case where creating a special needs trust and naming the trust as the beneficiary could be the best course of action.
If your situation is complicated and you’re not sure if you should name a person as your beneficiary or take other steps, such as creating a trust, consider talking with an estate planning lawyer before buying life insurance coverage or work with a financial advisor.
Be Smart About Choosing a Life Insurance Beneficiary
Naming beneficiaries for a life insurance policy is a big decision and one you shouldn’t take lightly.
Make certain you fully understand the rules for picking a beneficiary on your claim form and think carefully about whether you want just one primary beneficiary or multiple beneficiaries. And, make sure to update your beneficiary when any major life events occur that warrant an update.
If you aren’t sure how to pick a beneficiary or how to update who your beneficiaries are, you can contact your life insurance provider for more information.