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Life Insurance Beneficiaries: How to Choose One?

Part of enrolling in a life insurance policy involves choosing the amount of money you'd like to have disbursed, and whom to choose as a life insurance beneficiary. The person receiving the funds is known as a beneficiary, and there are many factors involved when it comes to who to designate, and how you want your funds distributed.

Key takeaways:

What is a beneficiary?

When you enroll in life insurance, you do so with the intention of the policy disbursing a certain amount of funds to an individual or entity, also known as a beneficiary.

A beneficiary can be:

  • Your spouse
  • A family member
  • Your favorite charitable organization
  • Your estate
  • A trust

You may wonder if you can have multiple beneficiaries on life insurance. The answer is yes, you can name multiple beneficiaries and allocate the funds as you see fit. You're not limited to the number of beneficiaries you can name, but remember that this will affect individual payouts, as the more you have, the smaller the percentage of funds available for each person to receive.

Types of beneficiaries

Beneficiaries are split into two types according to your level of priority for who receives the death benefit. These types are:

  • Primary. Those who are the first to receive the life insurance death benefit. If your primary beneficiary is still alive after you pass away, then the death benefit will be disbursed to them.
  • Secondary. Also known as contingent beneficiaries, these beneficiaries won't receive the death benefit if the primary beneficiary is still alive. However, if your primary beneficiary passes away before you do, the funds will go to the secondary beneficiary.

Beneficiaries may be designated by whether they are revocable or irrevocable. A revocable beneficiary can be removed as a beneficiary later, whereas an irrevocable beneficiary cannot be removed without the beneficiary's consent as typically the case for trusts.

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How to name a beneficiary

Naming a beneficiary is a process. Following a series of steps ensures you'll make the right choice and make the distribution process as quick and easy as possible. The steps for naming a beneficiary are:

  1. Assess all possible options for who you want to receive the benefit after you pass away.
  2. Establish primary and secondary beneficiaries.
  3. Gather identifying information.
  4. Decide how you want the death benefit to be distributed.

In the first step, individuals often choose their spouse and/or children as life insurance beneficiaries. From there, an individual can name contingent beneficiaries in a worst-case scenario.

The information provided must be as detailed and accurate as possible. Any beneficiary should be listed by full name, Social Security number, and date of birth. Vague descriptions are subject to interpretation, eventually becoming points of contention in a legal dispute. For example, if you have a "wife" listed as your beneficiary but changed spouses since getting the life insurance policy, your ex-wife could claim a death benefit that you wanted your current wife to receive. There are no particular life insurance spouse beneficiary rules.

If you only have one beneficiary, the process ends here. But if you choose multiple beneficiaries, the following step will be your final step, which is deciding how you'd like the death benefit to be distributed. Funds can be distributed in two ways: per stirpes and per capita.

With per stirpes, your beneficiaries receive their portions of the proceeds, and if a beneficiary dies before you, their portion of the death benefit will be equally distributed among his or her heirs (usually children).

Here's an example of how a per stirpes distribution of funds would work:

  1. You have two sons who are listed as beneficiaries;
  2. Each son gets 50% of the death benefit;
  3. One son passes away, but the other survives;
  4. The son who passed away has two children;
  5. 50% of the funds will go to the surviving son, and the other 50% will be split evenly between your two grandchildren.

Per capita distribution divides the death benefit evenly across all recipients.

Here is how per capita distribution would work in the above situation:

  1. You have a life insurance policy, and your two sons will receive 50% of the death benefit;
  2. One dies, but has two children of his own;
  3. The death benefit would be split evenly between your son and your two grandchildren;
  4. Your surviving son and two grandchildren each receive 33.3% of the death benefit.

Can anyone be named as a beneficiary?

Yes, anyone can be named as a beneficiary, but it can get complicated if you want to name a minor child as a beneficiary. This is because the law does not allow those under 18 to receive a direct payout. In this case, you have two options: appoint a legal guardian or set up a trust. If you choose a legal guardian, that person will be responsible for the death benefit since the money cannot go directly to your child. On the other hand, if you set up a trust, the death benefit will go into the trust and remain there until your child reaches adulthood.

Who you can name as a beneficiary extends to other entities beyond individuals. You can put your funds in your estate, charity, or, as mentioned, a trust. Out of these, naming your estate as a beneficiary can lead to a complicated situation. When funds are in an estate, creditors can seize them, and the distribution process is prolonged by probate, not to mention the estate taxes and potential legal fees.

Life insurance beneficiary after a divorce

Fortunately, you can update your life insurance policy as your circumstances change. If you have an ex-spouse and wish to remove them as your beneficiary, you just need to contact your insurance provider and request a change of beneficiary form. Once you've completed and submitted the paperwork, your ex-spouse will no longer be a beneficiary.

However, the process is different if you listed your ex-spouse as an irrevocable beneficiary when you initially purchased the policy. In this instance, your ex-spouse would have to consent to being removed as a beneficiary.

When to update your beneficiaries

You can update your beneficiaries at any time, but it's encouraged that you update this list after events such as:

  • Birth or death of a child
  • Death of a spouse or other beneficiary
  • Getting married or divorced

Can you split life insurance beneficiaries?

Yes, you can split life insurance beneficiaries, though how you choose to split the funds is just as important as who you split the funds between. That leads to this question: How do you split life insurance beneficiaries? The answer lies in percentages versus dollar amounts. It is better to allocate percentages of funds rather than specific dollar amounts, especially if you have a life insurance policy with a cash value component (i.e., whole life insurance). Any extra value a policy gains has no rules on how it can be divided, which can spawn a legal battle. Choosing to split funds as a percentage will solve this issue.

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