Can Anyone Be a Beneficiary on a Life Insurance Policy?

A life insurance policy provides a death benefit to designated individuals or entities upon the insured’s passing. Understanding who can receive these funds, known as beneficiaries, and how to properly assign them is important for ensuring your financial wishes are carried out. This article clarifies eligibility for naming a life insurance beneficiary and the practical steps for designation and management.

Who Can Be a Beneficiary

The scope of who can be named a life insurance beneficiary is broad, extending beyond immediate family members. An individual can designate a single person, multiple people, or various legal entities to receive the payout from their policy.

Beneficiaries can include relatives such as spouses, children, parents, siblings, or friends. Legal entities can also be named as beneficiaries, including trusts, which are frequently used for estate planning for minors or complex distributions. Charitable organizations and businesses can also be designated to receive policy proceeds, allowing for philanthropic giving or business continuity planning.

When purchasing a policy on another person’s life, the policy owner must demonstrate an “insurable interest” in that individual. This means the owner would experience financial loss if the insured passed away. However, if an individual purchases a policy on their own life, they have an insurable interest in themselves and can name almost anyone as their beneficiary, even someone without a direct financial relationship.

Special considerations apply when naming a minor child as a beneficiary, as minors typically lack the legal capacity to directly receive or manage significant funds. In such cases, life insurance proceeds are generally not paid directly to the minor but are instead held in a trust or managed by a court-appointed guardian or custodian until the child reaches the age of majority. Establishing a trust provides a structured way to manage and distribute funds according to the policyholder’s instructions.

Types of Beneficiary Designations

Life insurance policies offer various structures for beneficiary designations, allowing policyholders to plan death benefit distribution. The most common types are primary and contingent beneficiaries, which establish an order of precedence for receiving policy proceeds. A primary beneficiary is the first individual or entity designated to receive the death benefit upon the insured’s death. Policyholders can name one or multiple primary beneficiaries, often specifying the percentage of the payout each will receive.

Contingent, or secondary, beneficiaries are designated to receive the death benefit if the primary beneficiary is unable to do so. This could occur if the primary beneficiary predeceases the insured, cannot be located, or is legally unable to accept funds. Naming a contingent beneficiary is a recommended practice to ensure policy proceeds do not default to the insured’s estate, leading to probate and delays. Some policies may also allow for tertiary beneficiaries for additional succession if both primary and contingent beneficiaries cannot receive the benefit.

When designating multiple beneficiaries, policyholders often consider distribution methods such as “per stirpes” or “per capita.” “Per stirpes” means that if a named beneficiary predeceases the insured, their share of the death benefit would pass to their direct descendants. Conversely, “per capita” distribution means the death benefit is divided equally among the surviving named beneficiaries, excluding the descendants of any predeceased beneficiaries.

Another important distinction in beneficiary designations is between revocable and irrevocable beneficiaries. A revocable beneficiary can be changed or removed by the policy owner at any time without their consent. This provides flexibility to adjust designations as life circumstances change. In contrast, an irrevocable beneficiary cannot be changed or removed without their written consent. This provides higher security for the beneficiary but significantly limits the policy owner’s control, including taking loans against cash value or surrendering the policy.

Designating and Managing Beneficiaries

Properly designating and regularly managing beneficiaries is an important aspect of life insurance planning. Naming a beneficiary typically involves completing specific forms provided by the insurance company. Provide clear, accurate, and complete information, including the full legal name, date of birth, and relationship of each beneficiary, and in some cases, their Social Security number. For entities like trusts or charities, the full legal name of the entity, its mailing address, and tax identification number are often required.

Once beneficiaries are designated, it is important to review and update these designations periodically. Major life events, such as marriage, divorce, the birth of a child, or the death of a named beneficiary, should prompt a review of the policy to ensure the designations still align with your wishes. Financial goals and relationships can also change over time, necessitating adjustments to beneficiary allocations. A general recommendation is to review your life insurance policy and its beneficiaries at least once a year.

Changing a beneficiary usually requires submitting a new designation form to the insurance company. Ensure the change is officially recorded by the insurer, as verbal requests or will notations are generally not sufficient to alter a life insurance beneficiary designation. The change only becomes effective once processed and acknowledged by the insurance company.

Failing to name a beneficiary, or an unclear designation, can lead to unintended consequences. If no beneficiary is named, or if all named beneficiaries are deceased or cannot be located, the death benefit typically becomes payable to the insured’s estate. When proceeds go to the estate, they may become subject to the probate process, which can be time-consuming, involve legal fees, and expose funds to creditors. This can delay the distribution of funds to your intended heirs and reduce the net amount they receive. Therefore, maintaining accurate and up-to-date beneficiary designations is important to ensure life insurance proceeds are distributed efficiently and according to your wishes, bypassing probate and providing timely financial support to your loved ones.