Who Should You Put as a Beneficiary on Life Insurance?

A life insurance beneficiary is the person or entity named by the policyholder to receive the death benefit when the insured individual passes away. This designation influences how and to whom financial proceeds are distributed. Properly designating beneficiaries helps ensure the policy’s purpose—providing financial support—is fulfilled. Failing to make a clear designation can lead to complications and delays in the payout process.

Understanding Beneficiary Roles and Types

Policyholders distinguish between primary and contingent beneficiaries. The primary beneficiary is the individual or entity first in line to receive the death benefit when the insured dies. Policyholders can name multiple primary beneficiaries, specifying the percentage each receives. A contingent beneficiary, also known as a secondary beneficiary, is a backup recipient who receives the death benefit if the primary beneficiary is deceased or cannot be located. Naming both primary and contingent beneficiaries ensures the death benefit is distributed as intended, even if unforeseen circumstances affect the primary recipient.

Proceeds can be distributed using “per stirpes” or “per capita” designations. A “per stirpes” designation means if a named beneficiary predeceases the policyholder, their share passes to their direct descendants equally. For example, if a policy names three children as beneficiaries per stirpes and one child dies before the policyholder, that child’s share divides among their children (the policyholder’s grandchildren).

A “per capita” designation divides the death benefit equally among surviving named beneficiaries. If a named beneficiary predeceases the policyholder in a per capita arrangement, their share is absorbed and redistributed among the remaining living beneficiaries, rather than passing to their descendants. This distinction clarifies the policyholder’s wishes regarding generational distribution.

Beneficiaries can be various entities, not just individuals. Common choices include a spouse, children, parents, or friends. Trusts can also be named, offering a structured way to manage and distribute funds, especially for minors or those with special needs. Charitable organizations or other non-profit entities can also receive all or a portion of the death benefit.

Naming the policyholder’s estate as the beneficiary is an option, though less advisable. When the estate is the beneficiary, the death benefit becomes subject to probate, a legal procedure where a court oversees asset distribution. This can delay funds and subject the death benefit to estate taxes, creditors, and administrative fees typically avoided if a living person or trust were named directly.

Key Considerations for Your Beneficiary Choices

Minors and Special Needs

The age and capacity of potential beneficiaries are significant factors. Naming minors directly can create complexities, as minors cannot legally receive or manage large sums. A court may need to appoint a guardian to manage funds until the minor reaches the age of majority, usually 18 or 21, which can involve legal fees and court supervision. Establishing a trust and naming it as the beneficiary is a common solution, allowing a trustee to manage funds until the minor is mature enough.

For individuals with special needs, careful planning ensures the death benefit does not jeopardize their eligibility for government assistance programs, which often have strict asset limitations. Naming a special needs trust as the beneficiary is a common strategy. This trust holds assets for a person with disabilities without disqualifying them from means-tested government benefits like Medicaid or Supplemental Security Income (SSI). Funds within the trust can then supplement, rather than replace, government benefits, providing for additional needs.

Financial Dependents

Assessing financial dependents and their future needs is important when choosing beneficiaries. Life insurance primarily replaces the policyholder’s income and provides financial security for those who rely on it. This includes a spouse, children, or elderly parents dependent on the policyholder for living expenses, mortgage payments, or education costs. Coverage and distribution should align with these financial requirements to ensure dependents can maintain their standard of living and meet future goals.

Estate Planning Goals

Beneficiary designations interact with overall estate planning goals. Life insurance proceeds bypass probate, distributing directly to named beneficiaries without court involvement, which expedites payout and maintains privacy. While death benefits are income tax-free for the beneficiary, they may be included in the policyholder’s taxable estate for estate tax purposes, depending on estate size and policy ownership. Coordinating designations with a will, trusts, and other estate documents ensures a cohesive asset distribution plan.

Life Events and Conflicts

Marital status and family changes necessitate reviewing beneficiary designations. Events like marriage, divorce, birth or adoption of children, or the death of a named beneficiary or dependent should prompt an immediate policy review. For instance, divorce may not automatically remove an ex-spouse as a beneficiary, potentially leading to unintended distributions. New dependents or changing financial circumstances may also require adjusting beneficiaries or their allocated percentages.

Clear beneficiary designations prevent potential conflicts among heirs. Ambiguous or outdated designations can lead to disputes and legal challenges, delaying fund distribution and causing emotional distress. Clearly identifying beneficiaries and their shares helps ensure wishes are honored and minimizes family disagreements over the death benefit.

The Process of Designating Beneficiaries

• Obtain the correct form from the life insurance company or employer. This legal document records the policyholder’s choices for distributing the death benefit. Use the specific form provided by the insurer for proper processing.
• Provide accurate and complete information for each named beneficiary. This includes their full legal name (matching government identification), relationship to the policyholder, date of birth, and Social Security Number (SSN) or Taxpayer Identification Number (TIN). A current address and contact information are also important.
• Clearly specify primary and contingent beneficiaries on the form. If multiple individuals or entities are named, allocate specific percentages of the death benefit to each. Percentages for all primary beneficiaries must add up to 100%, and similarly for all contingent beneficiaries.
• Use precise naming conventions for specific entities. For a trust, provide the full legal name, trust agreement date, and trustee name. For a charity, provide the full legal name and current address. Naming the policyholder’s estate involves writing “My Estate” or “The Estate of [Policyholder’s Name].”
• Submit the accurately completed and signed form to the insurance company. Submission methods may include mailing, online upload, or in-person submission. Always retain a copy of the submitted form and any confirmation for your records.

Reviewing and Updating Your Beneficiary Designations

Beneficiary designations are not static and should be reviewed periodically to align with current life circumstances and intentions. Regular review, perhaps annually or every few years, is a prudent practice, even without significant life changes. This proactive approach helps confirm that designated beneficiaries are still appropriate and contact information is current.

Several common life events necessitate a review and potential update. These include marriage or divorce, the birth or adoption of children or grandchildren, or the death of a named beneficiary or dependent. Significant changes in financial circumstances or estate planning goals should also trigger a review. Additionally, changes in beneficiaries’ contact information, like a new address or phone number, should be updated.

The process for updating a beneficiary designation is similar to the initial designation. It involves contacting the insurance company for a new form. The policyholder fills out the form with revised information, indicating new primary and contingent beneficiaries or adjusting percentages. The completed and signed form is then submitted to the insurance company, and a copy should be kept for personal records.