Life Insurance Beneficiaries: How to Choose the Right Person

Consider your decision's implications before deciding who to put as a beneficiary on your life insurance policy. Choosing a beneficiary for life insurance affects your legacy and makes a statement to those left behind.

You should choose someone who would benefit the most from the money. Most people can’t choose just one person as their life insurance beneficiary, so they select multiple people to divide the death benefit.

Who you should put as your beneficiary depends on your situation, state laws and the people you have in mind. While there are no life insurance beneficiary rules dictating who you can designate, choosing a minor has specific implications. You can also change your life insurance policy beneficiary at any point. Just make sure whoever you name knows when and where to file a claim.

• What Is a Beneficiary and How Does It Work?
• Step-by-Step Guide to Choosing a Beneficiary
• Common Mistakes When Choosing a Beneficiary
• When to Update Your Beneficiary Choice
• Expert Advice on How to Choose A Beneficiary
• FAQ

A life insurance beneficiary is the person or persons who will receive funds from your life insurance policy if you die. As part of the life insurance contract, you designate a beneficiary name, and only this person can file a claim for the death benefit.

Almost anyone can be a beneficiary of a life insurance policy, and you can name more than one person.

Choosing the right type of beneficiary is essential in ensuring that your life insurance benefits are distributed according to your wishes. Here are the common types of life insurance beneficiaries:

• Primary Beneficiary: This is the main person or persons who will receive the death benefit. If alive at the time of the policyholder's death, the primary beneficiary in life insurance gets the entire benefit.

• Contingent Beneficiary: Also known as a secondary beneficiary in life insurance, this person or entity receives the death benefit if the primary beneficiary is deceased or unable to claim the benefit.

• Revocable Beneficiary: This type of life insurance policy beneficiary can be changed at any time by the policyholder without the beneficiary's consent, offering flexibility in managing the policy.

• Irrevocable Beneficiary: Unlike a revocable beneficiary, changes to an irrevocable beneficiary require the consent of the beneficiary of a life insurance policy, providing a more secure arrangement for them.

You can name anyone as a beneficiary for life insurance — from family members to friends, to organizations and even trusts. The choice often reflects the policyholder's personal relationships, financial responsibilities, values and long-term goals. Here are some expected beneficiaries:

Who to add as a beneficiary is just as important as how to divide up life insurance beneficiaries. You can choose one of three different methods. Your choice will determine how the life insurance funds will be distributed if you name multiple beneficiaries.

The method you select when adding a life insurance beneficiary is personal. The per stirpes method is the preferred method if you want to protect your grandchildren if they were to lose a parent.

A trust may be the better solution if you want to put specific contingencies on how the money is used, like care for a dependent child or so your grandchildren don’t waste the money while they’re young.

When you name a trust, the funds go there rather than directly to a person or your estate. You can detail how the money should be used, so you’re still in control even after you’ve passed on.

Whichever method you choose, remember that it’s not set in stone, and you can make changes at any time.

When you fill out a life insurance application, part of the process is adding a life insurance beneficiary. If you choose not to add a beneficiary to life insurance, the death benefit proceeds become part of your estate. This means the probate court will oversee how the funds are distributed, and you lose control over who gets the money.

If you have named a beneficiary or beneficiaries, giving them relevant information, including what happens when you are a life insurance policy beneficiary is essential. If they don’t have the information to file a claim or the insurance company can’t locate them because you didn’t provide enough information, the proceeds could become unclaimed property in your state.

The process of buying life insurance is relatively straightforward, but choosing a beneficiary for life insurance may be challenging for you. Completing this step-by-step process can help you choose your beneficiaries and who is best suited to receive the benefits.

If you decide to have multiple primary beneficiaries consider which distribution method fits best. The same goes for contingent beneficiaries if you choose to have them. There isn’t a right or wrong way to choose your life beneficiary, but completing this process can help you make the best choice for you.

Where you are in life, and your unique circumstances can dictate how you choose a life insurance beneficiary. Consider these different situations to help you select who should be the beneficiary of your life insurance.

Your life situation may make deciding who to add as a beneficiary an easy choice or complicate it if you have many people you feel obligated to. If you want a minor child to be your primary beneficiary, you should know the life insurance company cannot pay directly to them.

Instead, it may be best to open up a custodial account and name the account as the primary beneficiary. You could also name a trusted person who will be your child’s guardian after you’re gone.

Though you can name multiple people as your primary and secondary beneficiaries, the more people you name, the less money each receives. If you have specific requirements for how the funds should be used, creating a trust and naming it as your beneficiary is the best way to ensure your desired outcome.

Considering your current lifestyle and needs can help you determine who to add as a primary or secondary beneficiary to your life insurance.

Choosing a beneficiary for your life insurance policy isn't just about naming someone; it's about ensuring that your wishes are carried out and that the financial needs of your loved ones are met. Here are some key factors to consider when selecting a beneficiary:

• Financial Needs and Stability: Assess the financial needs and stability of potential beneficiaries. You may prioritize those with greater financial needs or dependents. Consider factors like current income, financial responsibilities and future financial prospects. This assessment can help ensure that the death benefit serves its intended purpose, providing support where it's most needed.

• Age and Legal Status: Be mindful of the age and legal status of beneficiaries, especially when considering minors or individuals with special needs. Minors may require a legal guardian or trust to manage the funds, while individuals with special needs may benefit from a special needs trust to preserve eligibility for government assistance.

• Multiple Beneficiaries: If naming multiple beneficiaries, consider how you want to divide the benefits and the relationships between the beneficiaries. Clear communication and thoughtful division can prevent misunderstandings and conflicts among beneficiaries. Consider using percentages rather than fixed amounts to accommodate changes in the policy's value.

• Contingent Options: Think about naming contingent beneficiaries as a backup, ensuring that the benefit is paid even if the primary beneficiary is unable to claim it. Contingent beneficiaries step in if the primary beneficiary predeceases you or declines the benefit. This adds a layer of security, ensuring that the death benefit reaches the intended recipients even in unexpected circumstances.

• Legal and Tax Implications: Understand the legal and tax implications of your choices, particularly when naming trusts or non-family members. For example, naming a trust as a beneficiary can have unintended tax consequences if not properly structured. In some cases, the trust may be subject to higher tax rates or required to take distributions over a shorter period, potentially leading to a larger tax burden. Additionally, if you name a non-spouse beneficiary, such as a friend or a sibling, the death benefit may be subject to estate taxes if it exceeds the federal estate tax exemption limit.

These common mistakes can complicate things for the person receiving a life insurance death payout. Consider these scenarios when deciding who you should put as your beneficiary, especially if it could cause negative consequences for them.

If you choose an organization to leave funds to, you need to be specific with the organization's full name, address and tax ID number.

Avoid naming “my children” as beneficiaries, especially if you have children from a previous marriage. Make sure your will matches your life insurance policy and make changes on both as needed, as they are separate legally binding contracts.

By avoiding common mistakes when choosing a life insurance beneficiary, you can ensure the insurance company distributes the funds correctly when you die.

You should update your life insurance beneficiary designations when life events change. While not all life situations warrant a beneficiary change, consider how the change affects the person or persons you have named as a life insurance beneficiary.

While most life insurance companies require you to fill out and submit a beneficiary change form in person, by fax or mail, some allow you to do it online. Ladder Life is one insurer that lets you add, delete or modify your beneficiary online through your account. Here are several scenarios when you should update your beneficiary name.

Though not all life changes require a beneficiary update, some do. Consider these events and whether they impact your choice of beneficiary. Some scenarios may also require coverage changes, like when you get married, take on debt or pay it off and if you have more children.

A beneficiary change is usually straightforward, as long as you have the specific details about the person you’re adding as a beneficiary. You can change your beneficiary whenever the need arises.

Choosing a beneficiary is just one step in buying life insurance. Choose wisely and consider adding a contingent beneficiary if something happens to your primary beneficiary.

You have questions, like “who should I put as my beneficiary?” and we have the answers. Here are responses to the most frequently asked questions about choosing a beneficiary for life insurance.