Life Insurance Beneficiary Rules

Name: Life Insurance Beneficiary Rules
Item: Life Insurance Beneficiary Rules
Author: Margaret Wack

When you take out a life insurance policy, you'll need to designate a beneficiary. Typical life insurance beneficiaries include spouses and family members, but you could also choose a close friend or a charitable trust.

Updated: June 18, 2024

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Your life insurance beneficiary is the person who receives the benefit of your policy after your death. This person is often a close family member, such as a spouse, parent or sibling. It's also possible to name multiple people as life insurance beneficiaries.

The type of life insurance policy you have and who you name as your beneficiary will determine how the payout process unfolds. Life insurance beneficiaries must first file a claim with the insurance company, after which insurers typically pay out claims within 30 to 60 days. For life insurance policies without a beneficiary, the policy's proceeds may become part of the estate, which can complicate the distribution of funds.

TABLE OF CONTENTS

Rules for Choosing Life Insurance Beneficiaries
Types of Life Insurance Beneficiaries
Rules for Death Benefit Payouts
How Payouts Are Split Between Beneficiaries
Life Insurance Beneficiary Rules After Divorce
How to Update Life Insurance Beneficiaries
FAQ About Life Insurance Beneficiary Rules

Key Takeaways

Primary beneficiaries receive the death benefit first, and secondary beneficiaries are next in line. Unlike revocable beneficiaries, irrevocable beneficiaries cannot be changed without consent.

Regularly updating your life insurance policy's beneficiaries ensures that it reflects changes in your life and fulfills your intentions for owning a policy.

If your life insurance has no beneficiary, the death benefit defaults to the estate as the life insurance beneficiary, potentially undergoing a lengthy probate process.

Rules for Choosing Life Insurance Beneficiaries

When you take out a life insurance policy, you can name a beneficiary or multiple beneficiaries. If you don’t name a beneficiary, your death benefit goes to your estate.

Most people designate their spouse, significant other, children or parents as beneficiaries, but you could name a sibling, a close friend or even a trust. When choosing your life insurance beneficiaries, you should consider where those funds would have the greatest impact in the event of your death.

Your life insurance policy is separate from your will or other aspects of your estate, so it’s best to name a beneficiary for your life insurance policy even if you’ve already set up a will.

You Can Refuse to Name Beneficiaries

It’s not strictly necessary to name a life insurance beneficiary. If your life insurance has no beneficiary, proceeds will become part of your estate, and the probate court will oversee the distribution of funds. However, we don’t recommend this option since it makes it more difficult for your loved ones and dependents to access the funds they need.

You Can Have Multiple Beneficiaries

You can name multiple life insurance beneficiaries, both primary and contingent. For example, you might name your spouse as a primary beneficiary if you're married. If you have adult children, you might also name all of your children as contingent beneficiaries, who would receive the payout if your spouse is no longer alive when you pass.

In Some States, You Must Name Your Spouse a Beneficiary

In community property states, you may be required to name your spouse as a life insurance beneficiary if you have one. If you name someone other than your spouse as a beneficiary, your spouse may still be entitled to 50% of the proceeds regardless of who is named. In cases of separation, life insurance beneficiary rules after divorce may require updating to reflect current relationships and obligations.

Minors Can Be Beneficiaries

Many parents take out life insurance policies to help provide for their children in the event of their death. You can name minors as life insurance beneficiaries, but they won’t be able to receive the benefit directly if they’re under 18 years old. For this reason, it’s usually best to designate a spouse or other caregiver as the beneficiary.

Charities and Organizations Can Be Beneficiaries

While it’s common to name a loved one as a beneficiary, it’s not strictly necessary. You can also name a charity or other organization as a beneficiary. This might be a good option if you’re already confident that your loved ones would be financially secure if you were to pass away.

Pets Cannot Be Beneficiaries

A life insurance beneficiary must be able to accept an inheritance and sign documents. For this reason, you can’t legally name your pet as a beneficiary of your policy. However, you can set up a trust designating the pet’s guardian as the beneficiary.

You Must Have Consent

If you’re purchasing a life insurance policy for another person with the intent to name yourself as a beneficiary, you must first obtain their consent. You must also have insurable interest, meaning that you depend on the individual and would be financially impacted by their death. In most cases, it’s a good idea to have an individual, such as a parent, take out a policy on their own behalf and name you as a beneficiary.

Beneficiary Lists Must Be Updated Manually

If you experience a life-changing event, like a divorce, your beneficiary list will not be updated automatically. Beneficiary designations need manual updates to align with your current wishes. You may want to keep an ex-spouse as a beneficiary, for example, if they would be responsible for caring for your children in the event of your death.

Some Beneficiary Designations Are Irrevocable

Some life insurance beneficiary designations are irrevocable, meaning they can’t be changed unless the beneficiary agrees to forfeit their right. Some policyholders choose to name certain family members, such as dependent children, as irrevocable life insurance beneficiaries. You should think carefully before listing someone as an irrevocable life insurance beneficiary since it can be challenging to change in the future.

MONEYGEEK DICTIONARY

A party has insurable interest when they depend on the insured financially and would have difficulty supporting themselves in the event of the policyholder’s death. For example, your spouse and any dependent children you might have most likely have an insurable interest. However, you can’t take out a life insurance policy on just anyone if you don’t have an insurable interest. For example, you likely couldn’t take out a life insurance policy on your coworker.

Common Mistakes to Avoid When Choosing a Beneficiary

Selecting a beneficiary for life insurance is a financial decision that requires thoughtful consideration and periodic review. Here are some common pitfalls and how to sidestep them:

Not Updating Beneficiaries: Life is dynamic, and your life insurance beneficiary designations should reflect those changes. Failing to update life insurance beneficiaries after significant life events can lead to unintended consequences, such as an ex-spouse receiving the death benefit.
Naming a Minor Directly: Designating a minor as a life insurance beneficiary can be problematic since they're legally unable to receive life insurance proceeds directly. Instead of naming them outright, consider setting up a trust or appointing a guardian to manage the funds until they reach the age of majority.
Being Vague: Ambiguity in naming life insurance beneficiaries can lead to legal disputes. Use full names and provide additional identifying information to eliminate confusion.
Overlooking Contingent Beneficiaries: Naming primary beneficiaries is standard, but what if they predecease you or cannot accept the benefit for some reason? Name a contingent or secondary beneficiary as a backup to ensure your assets are distributed as intended.
Ignoring Spousal Rights: In community property states, spouses may have a legal claim to a portion of the death benefit. Failing to consider this can result in legal complications and may not align with your intended asset distribution.

Avoiding these common mistakes can save your loved ones from legal hassles and ensure your assets are distributed according to your wishes.

Types of Life Insurance Beneficiaries

There are two main types of life insurance beneficiaries: primary and secondary or contingent beneficiaries. Primary beneficiaries are the main beneficiaries of an insurance policy. Secondary or contingent beneficiaries only receive a death benefit if the primary beneficiary or beneficiaries cannot receive it.

Primary Beneficiary

Your primary beneficiary is the first beneficiary of your life insurance policy. You can have more than one primary beneficiary. For example, if you have two younger siblings, you might name both as primary beneficiaries. Primary beneficiaries are the people to whom your life insurance payout will go first.

Secondary or Contingent Beneficiary

Contingent or secondary beneficiaries only receive a payout from your life insurance policy if your primary beneficiary is deceased. For example, you might name your spouse as a primary beneficiary and your children as secondary beneficiaries. If your spouse passes away before you do, your children will receive the payout as secondary beneficiaries in the event of your death.

Revocable vs. Irrevocable Life Insurance Beneficiaries

Understanding the difference between revocable and irrevocable beneficiaries can significantly impact your estate planning and financial security.

Revocable: A revocable beneficiary offers flexibility, allowing you to make changes at any time without needing the beneficiary's approval. This adaptability is beneficial when life circumstances change, such as after a marriage, divorce or the birth of a child.
Irrevocable: An irrevocable beneficiary provides a layer of certainty but at the cost of flexibility. Once you designate someone as an irrevocable beneficiary, you can't make any changes without their written consent. This type of beneficiary is chosen in cases involving alimony or child support agreements, where the beneficiary's financial security needs to be guaranteed.

The choice between revocable and irrevocable beneficiaries may have tax implications. Designating someone as an irrevocable beneficiary can influence the estate's tax liability. In some cases, an irrevocable beneficiary may be considered a gift recipient under tax laws, potentially subjecting the value of the insurance policy to gift taxes. The irrevocable status can sometimes remove the death benefit from your taxable estate, which could be advantageous for estate tax planning.

There could also be disadvantages. For example, if the irrevocable beneficiary's financial situation changes, you cannot redirect the funds to someone who might need them more without the beneficiary's written consent, potentially leading to less optimal tax outcomes for the new beneficiary.

Necessary Information for Naming a Beneficiary

When naming a life insurance policy beneficiary, you'll need to provide specific information to ensure a smooth transfer of benefits. Here are some of the most common pieces of information life insurance providers require:

Full Legal Name

Providing the full legal names of your life insurance beneficiaries ensures no discrepancies or legal issues due to a name mismatch.

Relationship to the Policyholder

Establishing the connection between you and the life insurance policy beneficiary helps the distribution process.

Social Security Number or Tax ID

These are used for identification and tax purposes, ensuring that the right person receives the benefit.

Contact Information

This includes the life insurance beneficiary's address, phone number and email to facilitate communication and the transfer of benefits.

Date of Birth

This confirms the life insurance beneficiary's age, which is especially important if the life insurance beneficiary is under 18 years old.

Percentage of Payout

If you're naming multiple beneficiaries, specify what percentage of the death benefit each should receive.

Special Instructions

If you want to attach any specific conditions or stipulations to the benefit, make sure to include them.

You should consider the impact of life events, such as divorce, on your life insurance beneficiary designation. Changing life insurance beneficiaries after such events ensures that your policy reflects your current intentions.

Providing detailed, accurate information is even more critical for those with minors as life insurance beneficiaries or considering irrevocable life insurance beneficiaries. This helps avoid complications and ensures that your wishes are honored. Consult your life insurance provider for any additional requirements they may have.

Rules for Death Benefit Payouts

Beneficiaries must first file a claim with the life insurance company to receive a life insurance payout. The primary beneficiary is the first designated recipient of these funds. However, if the primary beneficiary is no longer living, secondary or contingent beneficiaries are eligible to receive the benefit. Minors can’t receive death benefits, but a custodian can oversee the funds if a minor is designated as a beneficiary.

Beneficiaries Must Make a Claim to Receive a Death Benefit

Life insurance beneficiaries must file a claim with your insurer to receive a payout. The process isn’t automatic. If a policy has multiple beneficiaries, each beneficiary must make a separate claim to receive their portion of the funds.

The Primary Beneficiary Is the First Person (Or, if Multiple Primary Beneficiaries, Persons) to Receive the Death Benefit

If the life insurance policy has a designated primary beneficiary, they will be first in line to receive the death benefit for a life insurance policy. If the primary beneficiary is deceased, a secondary or contingent beneficiary is eligible to file a claim.

The Contingent Beneficiary Gets the Money if the Primary Beneficiary Is Deceased

Contingent beneficiaries can only receive a payout if the primary beneficiary is unable to do so. In most cases, this means that the primary beneficiary has passed away. They may also be unreachable or have declined to accept the payout.

You Can Choose How the Funds Will Be Dispersed

Policyholders can choose how they want to distribute life insurance payouts. For example, you might want to divide the payout equally between the named primary beneficiaries. You might want to choose a percentage for each life insurance beneficiary to receive. For example, 50% of a payout might go to your spouse, and 50% may be split amongst your children.

Minors Can’t Receive Death Benefits

Many people purchase life insurance to be able to provide for their families in the event of their death. While a minor can be named a life insurance beneficiary, they can’t receive death benefits until they turn 18. Instead, the proceeds will go to their legal guardian. You may be able to set up a trust to ensure that your funds are used to provide for your children, grandchildren or other dependent minors.

MONEYGEEK EXPERT TIP

Certain circumstances would prohibit a death benefit payout to beneficiaries. These include application fraud, nonpayment of premiums, contestable circumstances or not providing proper documentation (such as a death certificate).
— Mark Friedlander, Director, Corporate Communications, Insurance Information Institute

How Payouts Are Split Between Beneficiaries

You can split the payout between multiple life insurance beneficiaries in various ways. You may want to split it equally between multiple beneficiaries, divide it by a certain percentage or divide the payment for the benefit of younger generations if one of your beneficiaries has passed away. You can change how your policy’s payout is split between life insurance beneficiaries at any time.

Per Capita

If you decide to divide your policy’s benefit per capita, you’re splitting it “per head” so that each life insurance beneficiary receives an equal sum. This might be a good idea if, for example, you’re naming your three adult children as life insurance beneficiaries. If a beneficiary passes away, the payout is divided equally between the remaining beneficiaries.

Per Stirpes

Per stirpes in life insurance means “by branch.” If you decide to divide your policy’s payout per stirpes, it means that a death benefit will pass along a family lineage. For example, say you list your three adult children as primary beneficiaries of your life insurance policy. If one of your children passes away, then their children (your grandchildren) would be eligible for their parent's death benefit, making your grandchildren beneficiaries.

Specific Percentage

In some cases, you may want to allot different percentages of the death benefit to different life insurance beneficiaries. For instance, you may want your spouse to receive 70% of the death benefit and your parents or children to receive 30%. This method of dividing the death benefit is used when you have more than one life insurance beneficiary with differing levels of financial dependence on you.

These distribution methods ensure your life insurance beneficiaries receive their intended shares in a manner that reflects your wishes and their needs. You can change life insurance beneficiaries and adjust these preferences to match life changes. Regular reviews and updates to your life insurance beneficiary designation are essential for estate planning.

Life Insurance With No Beneficiary

If you don't name a life insurance beneficiary, the death benefit typically goes to your estate. This triggers a legal process known as probate, where a court oversees the distribution of your assets. Probate can be a lengthy and often costly process that may delay the disbursement of the death benefit to your loved ones.

When the death benefit is part of your estate, it becomes accessible to creditors. This means that any of your outstanding debts could be paid off using the death benefit, reducing the amount that goes to your heirs.

Life Insurance Beneficiary Rules After a Divorce

If you get divorced, it doesn’t automatically change your life insurance policy’s beneficiary. To remove your former spouse as a beneficiary, you must manually update your life insurance policy.

Even if you get divorced, you may still be legally required to share a portion of the death benefit with your ex-spouse, particularly if you share joint custody of children. Maintaining your ex-spouse as a beneficiary for life insurance might be necessary to ensure they can provide for your children in the event of your passing. Laws and life insurance beneficiary rules after divorce vary significantly by state. It’s wise to consult an attorney to ensure you know your obligations.

MONEYGEEK EXPERT TIP

If you don’t update your life insurance policy after a divorce, your ex-spouse might receive more of the death benefit than you’re comfortable with. After any major life event, including divorce, you should review your life insurance policy to ensure the named beneficiaries align with your wishes.

How to Change Your Life Insurance Beneficiary

Life circumstances may change, and your life insurance beneficiaries should reflect those changes. Whether you've recently married, divorced, welcomed a new child or experienced a loss, these significant life events are signals to review and update your life insurance beneficiaries. Here's a step-by-step guide to ensure your life insurance benefits go to the right people at the right time.

Contact Your Insurance Provider

The first step in changing your life insurance beneficiary is to get in touch with your life insurance provider. They will guide you through their specific process, which can vary from one company to another.

Fill Out a Change Form

Your insurance provider will typically require you to complete a "Change of Beneficiary" form. This form legally documents your new choice of life insurance policy beneficiary. Make sure to fill it out accurately to avoid any future complications.

Submit Documentation

You may need to provide additional documents for verification along with the change form. Depending on the nature of the change and the provider's requirements, this could include identification forms or legal papers.

Confirm the Change

Follow up with your insurance provider to confirm that they have accurately updated your life insurance beneficiary information. This final step ensures that your intentions are documented and will be executed as planned.

FAQ About Life Insurance Beneficiary Rules

Unlike other types of insurance, like auto insurance or homeowners insurance, the point of a life insurance policy is not to protect the policyholder but to protect the beneficiary. Knowing the answers to some of the most common questions can better equip you to make decisions regarding your life insurance beneficiaries.

What is a beneficiary for life insurance?

A life insurance beneficiary is a person or entity designated to receive the death benefit from a policy upon the insured's passing.

Who can you name as a life insurance beneficiary?

You can name anyone as a life insurance beneficiary as long as they have insurable interest. Many people name their spouse, children, parents or siblings as beneficiaries, but you can also name close friends. In some cases, policyholders may even choose to name a charity or other organization to receive the benefit.

Is your spouse automatically your beneficiary on life insurance?

No, your spouse is not automatically your life insurance beneficiary. You must explicitly name them on your policy for them to receive the benefit.

What is a contingent beneficiary for life insurance?

A contingent beneficiary for life insurance receives the benefit if the primary beneficiary cannot, ensuring the proceeds are distributed as intended.

Who receives the life insurance death benefit?

The primary beneficiary or beneficiaries of a policy receive the death benefit. However, if the primary beneficiaries are unable to accept the death benefit for whatever reason, then the payout goes to the secondary beneficiary or beneficiaries. In order to receive the payout, beneficiaries must first file a claim.

How does a divorce affect your life insurance policy?

If you get divorced, your life insurance beneficiary doesn’t automatically change. You’ll need to adjust your beneficiary to align with your current wishes. However, even if you choose to remove your ex-spouse from your policy, in some states, they may still be eligible to receive a portion of the benefits due to regulatory requirements. Before making changes to your policy after a divorce, you should consult with an attorney.

Can you designate more than one life insurance beneficiary?

Yes, you have the option to allocate the death benefit among several beneficiaries. You can also define what proportion of the benefit each individual will receive.

How do you split life insurance beneficiaries?

You can split life insurance beneficiaries by assigning specific percentages of the death benefit to each or through per capita or per stirpes distributions.

What if your chosen beneficiary passes away before you do?

Should your primary beneficiary die before you and no alternate beneficiary is listed, the death benefit becomes part of your estate. This situation can trigger a probate procedure, potentially delaying the disbursement and making the funds accessible to debt collectors.

What happens to life insurance with no beneficiary?

When life insurance has no beneficiary, the death benefit is transferred to the policyholder's estate by default.

What happens when life insurance goes to the estate?

When life insurance goes to the estate, it undergoes probate, where a court oversees asset distribution. This can significantly delay when heirs receive their inheritance and may also increase the estate's tax liability.

What happens if the owner of a life insurance policy dies before the insured?

In life insurance, three key parties are involved: the policy owner, who buys and controls the policy; the insured, the individual whose life the policy covers; and the beneficiaries, who are designated to receive the death benefit. In most cases, the policy owner is also the insured. However, there are instances where these two parties are different individuals.

In such cases, if the policy owner dies before the insured, the policy stays active as long as premiums are paid. Ownership may transfer according to the policy terms or the owner's estate plans, ensuring the life insurance beneficiaries still receive the death benefit upon the insured's passing.

Do life insurance companies contact beneficiaries?

Life insurance companies do not automatically contact beneficiaries; the beneficiaries must file a claim to initiate the payout process.

How long does a beneficiary have to claim a life insurance policy?

A beneficiary typically has no time limit to claim a life insurance policy, but sooner claims prevent potential complications with unclaimed funds.

What happens if the beneficiary does not claim life insurance?

If the beneficiary does not claim the life insurance, the proceeds may eventually be considered unclaimed property and turned over to the state.

How do you change the beneficiary on life insurance?

To change the beneficiary on life insurance, contact your insurer to fill out a "Change of Beneficiary" form and submit any required documentation.

Who can change the beneficiary on a life insurance policy?

Only the policy owner can change the beneficiary on a life insurance policy, ensuring control over who receives the death benefit.

Can a life insurance beneficiary be changed after death?

A life insurance beneficiary cannot be changed after the policyholder's death if the designation was irrevocable or the policyholder has passed away.

How do you find out if you are a beneficiary on a life insurance policy?

To find out if you're a beneficiary on a life insurance policy, contact the insurance company directly or review the policy documents if available.

How do you collect life insurance as a beneficiary?

To collect death benefits payout as a life insurance beneficiary, file a claim with the insurance provider, provide a death certificate and complete any required forms. Payment is typically processed within 30 to 60 days.

Who gets life insurance if the beneficiary is deceased?

If the primary beneficiaries are deceased, the death benefit goes to any secondary or contingent beneficiaries listed. If there are none, the death benefit will go to the estate as the life insurance beneficiary.

Can child support take life insurance from the beneficiary?

Child support agencies can, depending on state laws and the policy's terms, claim life insurance proceeds from a beneficiary if back child support is owed.

What happens if you have two primary beneficiaries and one dies?

If one of two primary beneficiaries dies, the surviving beneficiary typically receives the full death benefit unless the policy specifies a "per stirpes" distribution.

What information do you need to make someone your beneficiary?

To designate someone as your life insurance beneficiary, provide their full legal name, relationship to you, Social Security number or tax ID and contact information.

Is it better to have both primary and secondary beneficiaries?

Having both primary and secondary beneficiaries is prudent as it ensures the death benefit is distributed as intended, even if the primary beneficiary cannot accept it.

What happens if you have an irrevocable primary beneficiary?

If you designate an irrevocable primary beneficiary, changes to the beneficiary status cannot be made without their consent. This ensures the beneficiary's rights to the death benefit are legally protected.

What takes precedence: life insurance beneficiary status or a will?

The designation of a life insurance policy beneficiary generally takes precedence over a will. Even if a will states otherwise, the insurance policy’s named beneficiaries will receive the death benefit directly.