Purchasing life insurance is a decision many Americans make for a myriad of reasons, whether to ensure a spouse’s financial stability, clear mortgage debts, secure future educational expenses, or cover funeral and final costs. Regardless of the motivation behind such an investment, designating a life insurance beneficiary remains a crucial step.
What Is a Life Insurance Beneficiary?
A life insurance beneficiary is someone you pick to get the money from your life insurance when you die. This person gets the money because of the agreement you have with the insurance company. This happens no matter what your will says or what others think.
You can pick more than one person to get the money, and you can decide how much each one gets.
Life insurance can also help businesses. For instance, if a key person in a family business dies, the company might get the money to keep running.
The type of insurance you buy and how much money you can spend might change who you choose as the beneficiary. Let’s look at some examples:
- A 30-year term life insurance might help your kids pay for college or support a business.
- A small insurance policy could cover funeral costs.
- A universal life insurance might be good for people with lots of money who want to leave it to their family.
It’s important to choose the right person or group to get the money.
Primary vs. contingent beneficiary
When you have life insurance, you pick a main person, called the primary beneficiary, to get the money if you die. But what if that person also dies before you or can’t take the money? That’s when you need a backup person, known as the contingent or secondary beneficiary.
Here’s a simple breakdown:
- Primary Beneficiary: This person gets the money first when you die.
- Contingent Beneficiary: This person gets the money if the primary beneficiary can’t, like if they’ve already passed away or don’t want the money.
It’s smart to choose both a main person and a backup. You can pick family, friends, charities, your kids, or even the people who would take care of your kids if something happens to you.
If both the main person and backup can’t get the money, then it goes to your belongings or “estate”.
Who Can Be a Life Insurance Beneficiary?
You can pick anyone to be the person who gets money from your life insurance when you die. You can even choose charities or special financial setups called trusts.
But remember, some places have rules. In some places, you might need to give half the money to your husband or wife. If you want someone else to get it, your spouse might need to say it’s okay in writing.
How Do I Choose a Life Insurance Beneficiary?
Choosing a person for your life insurance money is like setting aside money for someone or something you care about: your partner, a charity you love, a pet, or even your own funeral. Usually, people pick the ones who’ll really need the money if something happens to them, like those who depend on what you earn or save.
Designating a beneficiary
When picking a person for your life insurance money, you have two choices:
- Revocable: You can change the person you’ve chosen whenever you want.
- Irrevocable: Once you pick this person, you can’t remove or change how much they get unless they say it’s okay. If you stop the insurance, you have to tell them.
Deciding how the death benefit will be paid
When deciding how the money from life insurance is given out, you have choices:
- Per Capita: Here, the money is shared equally among the people you pick, like all your kids.
- Per Stirpes: If one of your kids passes away before you, their share goes to their kids (your grandchildren). This way, you make sure even your grandkids are taken care of, especially if they’ve
Setting up a trust
If you want to take care of your grandkids, or even your two beagle buddies, setting up a trust with your life insurance money is a great idea. When you do this, the money goes straight to the trust instead of being mixed with your other belongings.
If you choose this, you need to pick trustworthy people to manage the trust. This way, you can make sure a young family member uses the money wisely, like for school, and doesn’t just buy a fancy car. Or, you can make sure a charity gets the funds to do good things, or that your pets are well taken care of.
Think of a trust like you steering your money’s path even after you’re gone. A lawyer can help you set it up.
It’s a big moment when you decide how to use your life insurance. It’s your choice, and you should do what feels right for you.
Life insurance is a strong promise, and it’s hard for anyone to argue against it. It’s even stronger than a will. Some people might not be happy with your choices, but they won’t know until after you’re gone, unless you tell them. And really, it’s your decision, not theirs.
Can you choose more than one life insurance beneficiary?
You can pick more than one person to get money from your life insurance. If you do, you need to decide how the money is shared. Here are some ways to do that:
- Specific Percentage: You decide what portion each person gets. Like, if you have two kids, you might give one 30% and the other 70% of the money.
- Per Stirpes: If one of the people you picked dies before you, their share goes to their family. Say you chose your two grown-up kids, and one passed away; their kids (your grandkids) would get the money.
- Per Capita: Everyone gets an equal share. If you chose three kids and one dies, the other two would share the money, getting half each.
Plus, you can decide how they get the money. They can either get it all at once or a bit at a time, like monthly payments.
How to name a beneficiary on your life insurance policy
Once you buy life insurance, you’ll pick someone to get the money when you die. This person is called your beneficiary. You’ll write their name on a special form called a life insurance beneficiary form. This form is powerful; it can even change what’s in your will.
When writing down your beneficiary, you’ll need:
- Their full name
- Their complete address
- Their phone numbers (both cell and home, if they have both)
- Their Social Security number
- Their birthday
Some people choose to give the money to a charity or a business. If you do this, especially as a backup choice, you’ll need:
- The full name of the place
- The main office’s address
- The place’s tax ID number
Make sure you think carefully about who you choose. This decision is essential.
When to Update, Change, Add or Remove Beneficiaries
It’s a good idea to check who you’ve picked as your life insurance beneficiary every year. Life events, like getting married or divorced, or losing someone, might make you want to change your choice.
Your life insurance isn’t locked in. You can change the person or people you’ve picked whenever you want, usually with a form or online.
Changes in your life or feelings can make you want to adjust your choices. Maybe one child helped you when you were sick, but another didn’t. Or, if you’re getting divorced and have kids, you might need to keep your insurance for child support.
Since life is always changing, it’s smart to have a backup choice for your insurance money, called a contingent beneficiary. This could be another person or even a charity. It’s especially important if you’re getting older and have picked your spouse as the main choice.
Life Insurance Beneficiary FAQ
Do I need a life insurance beneficiary?
It’s really important to name someone on your life insurance. If you don’t, there might be confusion about who gets the money. This can hold up the payment for a long time.
By picking a beneficiary, you make sure the money is given out fast and according to your wishes.
What happens if I don’t name a beneficiary?
If you don’t pick someone for your life insurance, it can create problems for your family when you’re gone. Without a named person, the money goes into your belongings and property. If you have a will, it decides who gets the money. If you don’t, the court will decide.
Can I change my beneficiary?
You can often change who gets the money from your life insurance whenever you want, as long as you still have the policy and it’s active.
But sometimes, you might need the okay from the person you originally picked before you can choose someone else. This can happen if, for example, your divorce agreement says something specific, or if you’ve made a choice that can’t easily be changed, known as an “irrevocable designation.”
Can I name a child as my life insurance beneficiary?
If you pick a young child to get the money from your life insurance, they can’t get it straight away. Instead, there might be a delay while someone is chosen to look after the money for them.
A solution is to use a trust. By making the trust the receiver of the insurance, the person in charge of the trust can claim the money and use it how you wanted.
Is it wise to name my disabled or special-needs child as a beneficiary?
If you choose someone getting government help, like for a disability, to get your life insurance money, it might cause problems. They could lose their support or get less money from the government.
But if you still want to help them without causing these issues, there’s a solution. This way, the person you want to help can still benefit from your insurance without losing their government support.
It’s a good idea to talk to a lawyer who knows about this to set up the trust in the best way.
Naming a life insurance beneficiary ensures that your intended recipients get the benefits swiftly and according to your wishes. Regularly reviewing and updating beneficiaries can prevent future complications and ensure your policy aligns with your life’s changes.