What do I need to know about naming beneficiaries?

Let’s start with the basics:

  • A beneficiary is someone designated in your life insurance policy to receive all or part of your death benefit. 
  • There can be more than one beneficiary – and in practice, there often is.
  • A beneficiary doesn’t have to be a person – it can also be an entity such as a church, charity, or family trust.

Primary and contingent beneficiaries

There are two basic types of beneficiaries named in a life insurance policy:

  1. Primary beneficiaries: The person or people who are first in line to receive life insurance proceeds when the insured passes away. If they die before you, your benefit is paid to the remaining primary beneficiaries, or if none, to contingent beneficiaries. 
  2. Contingent beneficiaries: The person or people next in line to receive the benefit if – and only if – the primary beneficiary dies. Contingents can also be designated as secondary beneficiaries, tertiary beneficiaries, and so on; a tertiary gets the proceeds if the primary and secondary both pass away before you do. 

But let’s consider another scenario, with more than one primary beneficiary: You want to leave your benefit to your adult children with your grandchildren next in line – but your children are still of childbearing age, so you’re not even sure how many grandchildren there will ultimately be. There are two basic rules for defining generational inheritance:

  1. Per stirpes:  This means that if your primary beneficiary dies before you, their share is divided equally among his or her heirs. For example, let’s say your two children – John and Susan – are your primary beneficiaries, and each gets half the proceeds. Let’s also say that John has three children. If John dies before you, then his three children would each get 16.66% of the proceeds (which equals 50%); the other 50% would go to Susan. 
  2. Per capita: This means that the proceeds are divided equally among all the surviving heirs. So in the example above, there are now four beneficiaries. Each of John’s offspring would get 25% of the benefit – and Susan also gets 25% as opposed to the 50% she would be entitled to per stirpes. 

There are any number of reasons to select per stirpes or per capita depending on your situation, but it’s important to understand how your life insurance proceeds will be allocated depending on the approach you choose.

Revocable and irrevocable beneficiaries

Your policy will ask you to designate your beneficiaries as either revocable or irrevocable. If a beneficiary is irrevocable, then you can’t change your mind without their consent – the death benefit must go to that person if they are still alive. Revocable means that you can make a change later on and decide to remove that beneficiary for another, without notifying them. Some professionals say it may be best to consider making them all revocable, even a spouse. Why? Because your situation can change. Also, if you stay married, you could decide to have the proceeds go directly to your children once they are adults. Or, at some point, your spouse could become incapacitated, and you may choose to leave your benefit to a guardian or trust charged with ensuring his or her care. 

Allocation among many beneficiaries

As previously noted, you can choose to have more than one beneficiary. For example, it’s relatively common for people in second marriages to allocate some of the proceeds to their new spouse and the rest to children from a previous spouse or partner. You don’t have to allocate evenly: you can designate one beneficiary to get the largest share of the proceeds, with the others getting varying lesser amounts. Some policies will let you choose between allocating by dollars or as a percentage of the total benefit. It may be best to allocate by percentage. Why? Because the death benefit amount can change. 

If you have a $200,000 whole life policy, the actual death benefit could be lower if you have an outstanding loan on the policy; alternately, if your policy has received dividends, the amount could grow to, say, $250,000. If you have two beneficiaries at 50% each, there’s no dispute: each receives $125,000. On the other hand, if you allocated $100,000 each, then there’s nothing telling the life insurance company what to do with the remaining $50,000. That could result in a legal action between your heirs – which is likely the exact opposite of what you want.

Can anyone be named as my beneficiary?

Technically speaking, yes – family members, business partners, charitable organizations, even friends can all be designated as a beneficiary; but there are some caveats, especially if you’re married. Here are some things to consider, depending on your relationship with a potential beneficiary:

Your spouse: People who are married with children still living at home commonly designate their spouse as the only primary beneficiary. After all, the most common reason for buying a life insurance policy is to help protect your family’s financial well-being. However, if you live in a state with common property laws, you may need your spouse’s consent to name anyone other than him or her as your primary beneficiary.

Other family members: As noted, it’s not uncommon to divide the proceeds among a spouse and any adult children – but you can and perhaps should consider allocating a share to other family members. For example, if you have a parent who is financially dependent on you or a sibling with special needs, you may want to consider naming them in your policy.

Friends: This is not a problem (subject to the spousal permission caveat above). However, since friends can grow apart over the years, consider designating them as revocable beneficiaries.

People with whom you have a financial relationship: If someone co-signed your mortgage or a business loan, or helped pay for your education, they can be designated as beneficiaries to help ensure your financial obligations are met.

Minors: Minors cannot legally manage their own money. If you are unmarried with minor children and want to name them (or any other person below the age of legal consent), the life insurance company may require that you name a legal guardian as the beneficiary or designate one for them under the Uniform Transfers of Minors Act. In any case, you should know that the proceeds will not be paid until the court appoints or approves the minor’s guardian.

Your estate: You can choose to leave the entire policy proceeds to your estate, where it will be distributed after probate by your Executor according to the terms of your will – which you must have if you plan to go this route. Before doing so, you should discuss the tax implications with your accountant or financial professional.

A trust: A trust is an entity that can hold assets over time with a Trustee that you designate to distribute funds according to the conditions you set, for example, to take care of a family member with special needs or pay educational costs for grandchildren of different ages. You will need to set up the trust with an attorney beforehand, and you should discuss the tax implications with your accountant or financial professional.

A charity: A charity or church can be named as a primary or contingent beneficiary.

Be sure to have identifying information about your beneficiaries 

It really isn’t enough to provide a beneficiary’s name, because people can and do change their names over time. You want to make it as easy as possible for the life insurance company to identify the correct person when it comes time to distribute your death benefit, years or decades down the road. Try to provide the following – at least – for each beneficiary:

  • Full name, correctly spelled, including any middle names
  • Any maiden or former names
  • Date of birth
  • Social security number
  • If not a U.S. citizen, their nationality and passport number

Once you have named them in your policy, let your beneficiaries know that they are included. Consider giving them a copy of your policy so they can contact the life insurance company when the time comes. 

What if you want to change a beneficiary? 

If a beneficiary is irrevocable, it is almost impossible to remove them from a life policy or change their share without their consent. For revocable beneficiaries, the change process is relatively easy, and you don’t need permission (unless it’s your spouse and you live in a common property state). For example, with Guardian, a beneficiary change can be done online in a few minutes by going to GuardianLife.com  and signing in or registering for an account . Other life insurance companies may require a phone call or ask you to fill out a paper form and send it back.

How do I choose my beneficiaries?

That is an entirely personal question, and there is no wrong answer. But if for whatever reason, your beneficiary choice isn’t immediately clear, it may help to ask yourself a few questions:

  1. What stage of life are you at?
  2. What is your purpose for getting life insurance?
  3. Do you trust the person to use the proceeds appropriately?

If you are married with young children who depend on your income, the obvious answer will likely be to name your spouse as the primary beneficiary, so he or she can use the money to support your family in the best way possible. 

But that may not be your situation. You could be recently divorced with minor children and may have a more complicated arrangement, in which case you may consider leaving the proceeds to a trust set up for the care of your children. If you are young and single, you may wish to name your parents as beneficiaries to provide them with needed extra help, or as reimbursement for student loans they are paying off on your behalf. Or you could be well into retirement, own a family business operated by two of your children, and choose to make the third child your beneficiary because you’re using life insurance to equalize the distribution of estate assets. Again, if you’re not sure who your beneficiaries should be, it may be a good idea to discuss your situation with a life insurance professional or financial professional with experience in all the ways to use life insurance. If you don’t know such a professional, ask a friend or colleague for a recommendation. Or, Guardian can connect you to a financial representative who can help. 

What if you don’t name a beneficiary?

The life insurance company may delay your application if no beneficiary is designated, or at the very least, reach out to you to remind you to do so. But if you persist and no beneficiary is named, the insurance company will default to paying the benefit to your estate. This may slow down the distribution of assets because your estate will need to go through probate – the process of waiting for the courts to sanction the terms of your will. The benefits may also be subject to taxes and legal fees, which can reduce the sums eventually distributed to your heirs. On the other hand, if you and your tax, legal and financial professionals believe it will be advantageous to have the proceeds go to your estate, then you should state that in your policy by naming the estate as the primary beneficiary, instead of letting it happen by default.

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Frequently asked questions about life insurance beneficiaries

How are life insurance beneficiaries paid?

There are typically two options for receiving the proceeds. A beneficiary can choose to take a lump sum (this is the most common choice); alternately, he or she can elect to receive payments in monthly installments or as part of an annuity, to help them manage their money.  

Can a life insurance beneficiary be denied the death benefit?

A benefit may be denied if there’s been a violation of one of the terms of the policy. For example, many policies have a suicide clause that lets them withhold benefits, at least during the first two years of the policy.

Do beneficiaries pay tax?

The death benefit is generally paid to beneficiaries income tax-free  It’s always a good idea to consult a tax professional about your specific situation.

Can a friend be a life insurance beneficiary?

Yes, just about anyone can be a beneficiary. However, in some cases, you may need to get your spouse’s permission to do so. 

What does it mean to be someone’s beneficiary?

The beneficiary of a life insurance policy is a person or entity (such as a charity) that receives all or a portion of the policy proceeds.

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Disclaimer

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

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