How To Choose a Life Insurance Beneficiary [2024]

Choosing a life insurance policy beneficiary can be a difficult decision. Still, it is a crucial step in ensuring that your loved ones are taken care of after your passing. 

A beneficiary is a person or entity designated to receive the death benefit from a life insurance policy. Therefore, it’s important to consider who will depend on your income and how and when you want them to receive the benefits. 

So how do beneficiaries work? Continue reading for tips on choosing a beneficiary and what to consider during the decision-making process when choosing from the different types of life insurance.

What is an insurance beneficiary?

A beneficiary is an entity or person that will receive money or other benefits from your insurance policy or retirement plan after your death. You can name more than one beneficiary, known as a contingent beneficiary. 

The beneficiary can be:

• A family member
• Friend
• Charity
• Your estate

When the insured person dies, the beneficiary must provide proof of death to the insurance company or plan administrator to receive any benefits. When you consider how much life insurance you need, you can review recent end-of-life care costs and statistics. 

If you name an estate as the beneficiary of your life insurance, the death benefit will go through probate and may be subject to taxes before it can go to your heirs. Therefore, it’s important to consider who will depend on your income and choose a beneficiary who can use the funds as you intend. You can read more about “Does life insurance go through probate?” in this article.

Primary vs. Contingent Beneficiary

There are two types of life insurance beneficiaries:

• Primary Beneficiary. The primary beneficiary is the first person or entity to receive the death benefit from the policy. You can have multiple primary beneficiaries.
• Contingent Beneficiary. The contingent beneficiary will only receive the death benefit if the primary beneficiary is unable or unwilling to accept it.

When you designate a contingent or life insurance secondary beneficiary, they will inherit your death benefits in the event your primary beneficiary passes away before you do. 

For example, you may choose your spouse as the primary beneficiary and your children as the contingent beneficiaries. If something were to happen to your spouse, the death benefit would go to your children.

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Who can be a life insurance beneficiary?

You can name almost anyone as a life insurance beneficiary, including family members, friends, business partners, or even your estate.  It is important to consider their age, financial stability, and ability to properly manage the funds before naming them as a beneficiary. 

However, You can’t name your pet as your insurance beneficiary because pets are considered property and not legal entities capable of owning or managing assets.

Insurance beneficiaries must be individuals or organizations with legal standing to receive and manage the proceeds.

Read More: Why You Can’t Name Your Pet as Your Life Insurance Beneficiary

How to Choose a Life Insurance Beneficiary

Choosing a life insurance beneficiary is a personal decision, but there are some general things to keep in mind. You will want to choose someone financially responsible and use the money wisely. Consider choosing someone younger than you so that they can benefit from the money for a longer period of time.

Another thing to consider is whether you want to name more than one beneficiary. You may want to do this if you have children who are still minors or from a previous marriage. By naming more than one beneficiary, you can ensure that the money will be used as you intended.

It’s helpful to understand life insurance for same-sex couples if that applies to you.  You will also need to decide whether you want your beneficiaries to receive the death benefit all at once or in installments. Again, you should discuss this with your beneficiaries, so they know your wishes and can make financial plans accordingly.

Once you have considered all these factors, you will be ready to choose your life insurance beneficiary. This is an important decision, so take your time and ensure you are comfortable with your choice.

Designating a Beneficiary

Your first step when getting life insurance is to designate a beneficiary. Choosing someone you trust is crucial because they’ll be responsible for handling the money. 

When naming a beneficiary, you have two choices:

• Revocable Beneficiary. You are free to change who your beneficiary is at any time during the policy’s term.
• Irrevocable Beneficiary. You cannot change the beneficiary without their consent. Also, you must notify them if you cancel the policy.

Your beneficiary doesn’t need to be a family member. You can choose anyone you like, as long as they meet the requirements set by your life insurance company. So, take some time to think about this critical decision, and talk to your loved ones about who you want to receive the payout if something happens to you.

Be specific when designating a beneficiary. Include their full legal name, contact information, and relationship to you.  The more information you provide, the easier it is for your insurance company to identify and properly distribute the funds to the correct person.

It’s important to note that some insurers will not allow you to directly name a child as a beneficiary if they are under 18 years old. However, in these cases, you can name their legal guardian as the beneficiary. Read more in this article, “What if I want my child as the beneficiary of life insurance” to learn more. 

The Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) allows you to name a custodian for a minor’s financial assets, including life insurance proceeds.  

Deciding How the Death Benefit Will Be Paid

When you buy life insurance, you also have to consider how the insurance company will distribute the payout to your beneficiary.

There are two main options:

• Per capita
• Per stirpes

Per capita distribution divides the death benefit equally among your surviving beneficiaries. For example, if you have four children and name them beneficiaries, each would receive 25% of the death benefit.

Per capita is the simplest option and can be a good choice if all your beneficiaries are adults capable of managing their finances.

With per stirpes distribution, the death benefit is divided among branches of your family. So, if you have three children and one predeceases you, their portion of the death benefit would go to their children instead. 

Ultimately, there is no right or wrong answer when deciding how to distribute your life insurance death benefit. It simply depends on your personal preferences and circumstances. Be sure to talk to your life insurance agent to discuss your options to make the best decision for your loved ones.

Read more: Per Stirpes vs. Per Capita: What is the difference? 

Setting Up a Trust

Setting up a trust for your life insurance death benefit can provide financial protection and guidance for your beneficiary. The trust, managed by a trustee, will determine when and how the beneficiary can access the funds.

Various types of trusts can be used for life insurance proceeds, such as irrevocable life insurance or a special needs trust. It is advisable to work with a qualified attorney to set up the trust and ensure it meets your needs and complies with legal requirements.

Aside from providing financial protection, setting up a trust can also help mitigate taxes on the death benefit and maintain privacy for your beneficiary. 

However, remember that once you transfer ownership of the life insurance policy to the trust, you will only be able to make changes to it with the trustee’s approval.

When to Update, Change, Add or Remove Life Insurance Beneficiaries

You should review and update your life insurance beneficiary designation regularly. You also want to be aware of the reasons life insurance won’t pay out so you can avoid any surprises to your beneficiaries if something does happen. 

It’s especially important when there are major life events, such as: 

• Marriage
• Divorce
• The birth of a child
• Death of a beneficiary

If there are discrepancies between your beneficiary designation and your will, the beneficiary designation will take precedence. So, it is crucial to keep your beneficiary designation up to date with your current wishes. 

In case of a divorce, find out if your state has any laws regarding the division of life insurance benefits. Some states may automatically remove a former spouse as a beneficiary, while in others, you will need to actively change the beneficiary designation.

If you need to change, add, or remove a beneficiary, it is typically a simple process that can be done through your life insurance company or agent. You can do your own research or read our article about the best life insurance companies. 

Read more: How to Handle a Life Insurance Policy After a Divorce

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Case Studies: Choosing a Life Insurance Beneficiary

Case Study 1: Protecting Minor Children

Sarah and Mark are a married couple with two young children. They understand the importance of securing their children’s future in case of an unfortunate event. After consulting with their financial advisor, they decide to designate a trust as the primary beneficiary of their life insurance policies. (For more information, read our “How to Find a Life Insurance Advisor“).

The trust ensures that their children will receive the necessary financial support for their education and well-being until they come of age.

Case Study 2: Ensuring Financial Stability

John is a single individual with aging parents who depend on his financial support. He wants to make sure they are taken care of even after he’s gone. Considering their age and financial needs, John designates his parents as the primary beneficiaries of his life insurance policy.

He discusses his decision with them, ensuring they understand how to manage the funds responsibly.

Case Study 3: Supporting a Charitable Cause

Laura is passionate about a particular charitable cause and wants to continue supporting it even after her passing. She decides to name the charity as the primary beneficiary of her life insurance policy.

By doing so, Laura ensures that her financial contribution will have a lasting impact and support the cause she deeply cares about.

Case Study 4: Protecting Business Interests

Michael is a small business owner who wants to protect the future of his business and his family’s financial security. He decides to establish a buy-sell agreement funded by life insurance.

In the event of his death, the policy’s death benefit will be used to buy out his shares in the business, ensuring a smooth transition and financial stability for his family.

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