Insurance is sort of a strange product to buy, in that it’s something you never want to use. Take auto insurance: you’re glad to have the protection when you’re in an accident, but if you have to use it…well, that means you were in an accident.
Life insurance takes it a step further. You buy it, but you never actually use it. It kicks in when you’ve kicked the bucket, and the real beneficiaries are your families and loved ones who receive the death benefit.
That’s why, in life insurance parlance, they’re called the beneficiaries.
But what exactly does it mean to be a life insurance beneficiary? How do your beneficiaries affect your life insurance policy? Here’s what you need to know before – or even after – you buy a life insurance policy.
What is a life insurance beneficiary?
Here’s our official definition of a life insurance beneficiary:
“The beneficiary is the recipient (or recipients) of your policy’s death benefit. This can be one person or organization, or several persons or organizations. You pick whom the death benefit goes to, and what percentage of it each receives.”
That’s a pretty good explanation, if we do say so ourselves. The beneficiary is the person, people, or place that receives the death benefit on your life insurance policy.
When you die, your beneficiary will need to produce a copy of your death certificate, a policy document outlining the information about the policy, and the claim form, aka a request for benefits, in order to claim the death benefit. You should let your beneficiary know that you’ve designated them, and where to find the policy details, so they can take action if they need to and the death benefit will go to them like it’s supposed to.
Primary vs contingent beneficiaries
You may not want to play favorites with your family in real life, but you can when it comes to your life insurance death benefit.
A primary beneficiary is the party that the insurance carrier will pay out first. If the primary beneficiary is deceased or has gone out of business, the contingent beneficiary is next in line. It’s important to set up both so it’s legally outlined who will get your money; if your primary beneficiary dies and you didn’t name a contingent, there could be a huge battle over who receives the death benefit – the last thing you probably want to happen. If you haven’t named a contingent beneficiary, do so when you review your policy (which we’ll discuss later).
You can also have multiple beneficiaries. In this scenario, you’re able to designate different percentages of the death benefit to different people: if you have three beneficiaries, one could get 50% of the death benefit and the other two could get 25% each.
If one of the primary beneficiaries die, the death benefit is split between the remaining beneficiaries; in the above scenario, if the 50%-holder died, the other two beneficiaries would be bumped up from 25% each to 50% each. Contingent beneficiaries only come in play if all of the primary beneficiaries
Who can be a life insurance beneficiary?
You can name anyone as a life insurance beneficiary. Heck, it doesn’t even have to be a person. But “anyone” isn’t really a good answer, so here are the most popular beneficiary choices:
Spouses are the most common beneficiaries of life insurance payouts. This makes sense: you usually get life insurance to continue providing for your family after you’re gone; that means paying the mortgage, saving for college, and covering everyday costs that affect not only your spouse but your kids. And, as we’ll get to in a bit, you really shouldn’t leave money directly to your kids.
Note that in some states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin – assets are deemed community property, so if you bought your life insurance policy after you got married, you own it equally with your spouse automatically. You’d actually need his or her permission to name someone else as the beneficiary. (Of course, that means you can’t name your secret lover as your beneficiary without your spouse’s permission, so…)
Let’s start out by saying this: don’t name a child as your life insurance beneficiary. There are a number of legal hoops you have to jump through when you leave anything to a minor, and a death benefit is no different. But if you were to do it…
Don’t name your child as a direct beneficiary. If you do, the court will appoint a guardian, who will have oversight until the child is 18 or 21 (depending on the state). That means attorneys’ fees and court proceedings that make the experience a lot less pleasant.
Instead, designate a guardian for your child through the Uniform Transfer to Minors Act, or set up a trust. There are a lot of things that go into these, so check out our full primer for the details and talk to a financial professional.
Life insurance is crucial to small business owners because they not only have their family depending on them, but their business, too. With key person life insurance, a company pays for the policy and is the beneficiary. If the policyholder dies, the business can use the money to hire your replacement, cover business losses, or pay debts.
This is a broad category, but you can leave your benefit to almost anyone – or anything.
- Pets – You’ll need to make sure you set up a trust, like you would with a child.
- Cultural institutions and charities – If you’re a patron of the arts, you can name a museum or zoo as your beneficiary so other people can continue to enjoy them long after you’re gone.
- Religious groups – Do one last good deed on your way out by leaving money to your church or congregation.
- Monuments and national parks – Keep American pride alive by donating to a park or monument – just like with museums, you’ll be making the day of countless people to come.
Updating your beneficiaries
You obviously have a lot of choices about who – or what – to leave your life insurance death benefit to. That’s a lot of pressure, right? What if you make a mistake?
Don’t worry: you can, and should, review your life insurance beneficiaries regularly. One easy way to do this is sit down every year at tax time and review your life insurance policy while you’re waiting for your refund. That way it happens like clockwork and you don’t forget about it.
You should also review your beneficiaries when your relationship with a beneficiary changes. Maybe you’ve gone through a divorce, are estranged from your children or your current beneficiary died (hopefully not all three). You don’t want your money going to them, or getting held up in court while people argue over it.
The good news is that updating your beneficiary is easy. All you have to do is fill out a form like this, send it to your life insurer, and that’s it! One thing to note: some insurers will require the form faxed or mailed in, while others will allow you to update online. Make sure you know which one your insurer accepts so there aren’t any mix-ups during the process.
When you’re updating your beneficiaries, it’s important to be specific. Use names and Social Security numbers; if you list simply “wife” or “estate,” the ambiguity will almost certainly lead to a legal battle. And follow our tips above regarding primary and contingent beneficiaries, children, and third parties, because again, you want your money to go where you intended it.
Whoever you choose as your beneficiary, the important thing is to choose someone. The whole purpose of life insurance is to provide money to someone; usually it’s your family, but as you can see, you have a lot of options. The last thing you want is to pay for a life insurance policy for years – or decades – and have the money go somewhere you didn’t intend.