Choosing a beneficiary

Designating a life insurance beneficiary is an important step in purchasing a policy. Your beneficiaries are the people or organizations that will receive the proceeds of your life insurance coverage after you die. You have many considerations to make when choosing who should receive these funds.

Take care to choose the right beneficiaries, to name alternate beneficiaries, and to designate them in a way that will be clear to your insurer.

Please be advised that nothing contained in this article should be considered legal or tax advice. You are strongly encouraged to obtain such advice from your personal tax and legal advisors.

What is a life insurance beneficiary?

A beneficiary is a person or entity that you want to receive your life insurance policy benefit. Your beneficiaries can include one or more people, organizations, charities, or a trust.

Subject to certain limited exceptions, your insurance company will pay your beneficiary (or beneficiaries) a specific amount of money if the life insurance policy is in-force when you die.

Who chooses the policy beneficiaries?

The owner of the life insurance policy can designate or change beneficiaries.

If you take a life insurance policy out on yourself, you control who the beneficiaries are. If a spouse, employer, or organization buys a policy that pays when you die, then they — not you — would own the policy and therefore would have the power to choose the beneficiary.

Types of beneficiaries

There are several beneficiary types. The number and types of beneficiaries can vary widely on an individual life insurance policy.

Primary, contingent, and tertiary beneficiaries

It’s a good idea to name alternate beneficiaries in case your preferred beneficiaries die before you or in case they cannot be found after your death. These alternate beneficiaries are called contingent and tertiary beneficiaries.

Primary beneficiaries are your first choice to receive the death benefit when you die.

Contingent beneficiaries receive the death benefit if the primary beneficiaries are already dead or cannot be found.

Tertiary beneficiaries receive the death benefit if both the primary and contingent beneficiaries are dead or cannot be found.

Irrevocable vs. revocable beneficiaries

Irrevocable beneficiaries cannot be changed unless they provide written consent.

Revocable beneficiaries can be changed or removed before the policyholder dies without consent of the beneficiary.

Beneficiary trust

If you designate a trust as a beneficiary, your policy death benefits will be paid to the designated trust upon your death. A trust is an arrangement that allows a third party to hold property or assets that will ultimately be given to another person (beneficiary) later on.

A trust is commonly established for dependents such as children who cannot receive life insurance death benefits due to their age. You must have a legal and established trust linked to the policy in order to name it as a beneficiary.

Beneficiary estate

If you designate your estate as a beneficiary, your policy death benefits will be paid to your personal estate upon your death.

However, there are tax implications of designating your estate as a beneficiary. Life insurance benefits are usually income tax exempt, but they may be taxed if they are paid to your estate, according to the Internal Revenue Service (IRS). Consult a tax attorney or certified public accountant for tax advice related to your life insurance policy.

Beneficiary charity

If you designate a charity as a beneficiary, your policy death benefits will be paid to that specific charity upon your death. You must provide the charity name and contact information on your policy application form.

Designating your beneficiaries

When you apply for a life insurance policy, it’s important to clearly designate any people or entities that you want to be a beneficiary.

You can designate a beneficiary by name (such as “John Smith”) or by class designation (such as “all surviving children”). Trusted Choice advises you to name beneficiaries to avoid any future legal confusion.

When you fill out your life insurance policy forms, you will provide the beneficiary contact information such as name, social security number, and address. This information is used by the insurance company to identify and locate the policy beneficiary after your death.

Beneficiary rules & guidelines

It is important to review the insurance company’s guidelines before deciding on a beneficiary.

Beneficiaries must have an insurable interest in you

In order to label someone as a beneficiary, the person or entity must have an insurable interest in you. If a person or organization can suffer financially from your death, then that entity has an insurable interest in your life.

Designating a minor

Most state insurance departments and insurance companies have strict rules about designating a child as a beneficiary. These states and insurers often require a guardian to be appointed to appropriately distribute the policy funds to the child. The guardian will be in place until the child becomes an adult.

Multiple beneficiaries

Your policy benefits can be divided countless ways between people and entities. If you designate more than one beneficiary, you must specify how the proceeds should be divided upon your death.

Since the policy’s value may vary from year to year, the American Institute of Certified Public Accountants generally advises to list percentages instead of dollar amounts for distribution. You also may designate one beneficiary to receive any remaining policy balance.

If you want the benefits divided equally among family members or heirs, you can do so in two different ways: per capita or per stirpes.

Per capita distribution is when the death benefits are split up equally among all of your descendants (e.g., daughters, sons, and grandchildren).

Per stirpes distribution is when the death benefits are split up equally among only your closest-related descendants (e.g., your daughters and sons). If any of those beneficiaries are already dead or cannot be found, then their shares get split up equally among their own closest-related descendants (e.g., those missing beneficiaries’ daughters and sons).

Changing the beneficiary

Your beneficiary preferences can evolve along with your living situation. Certain life events like marriage and the birth of a child can trigger the need to change your life insurance policy beneficiaries. You should review your beneficiary list periodically or after any major life event to ensure that it still fits your needs.

If you are the policy owner, you can change the beneficiary on your life insurance policy as often as you want, unless you have one or more irrevocable beneficiaries. To update the beneficiary, you must fill out a change of beneficiary form with your life insurance provider.

Changing beneficiaries after a divorce

Many life insurance policyholders name a husband or wife as a beneficiary. If you get a divorce and remarry, you should update your policy beneficiary from your ex-spouse to your current spouse.

When an insurance company pays a death benefit, it refers to the contact information provided under the beneficiary designation section. If your ex-spouse is still labeled as the primary beneficiary, they may still receive your policy death benefits, even though their current title is not accurate and they are not your current spouse.

Community-property states

If you live in a community-property state and you are married, you might have to perform one extra step if you want to add a beneficiary other than your spouse.

“If you make the beneficiary someone other than your spouse, it may be a good idea to get a signed statement from your spouse waiving his or her rights to any community property interest in the benefit,” according to Aetna.

According to the IRS, the following are community-property states:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

Problems with beneficiaries

Even if you designate a beneficiary for your life insurance policy, you may run into other issues such as the beneficiary’s death, incarceration, or international status.

Deceased beneficiary

If the policy beneficiary dies and there is another beneficiary named, the death benefit will be transferred to the other beneficiary. For example, if you name your mother as your primary beneficiary but she dies before you do, your contingent beneficiary will receive the death benefit. If you do not have any surviving beneficiaries, your death benefit will be paid to your estate.

Incarcerated beneficiary

If the beneficiary is incarcerated, the beneficiary may or may not have access to the funds upon release. The exact rules depend on state laws and the nature of the beneficiary’s crime. For example, some states do not allow the incarcerated person to receive any death benefits. Instead, the benefits will be shared with any remaining beneficiaries or could go to the incarcerated beneficiary’s next of kin.

Beneficiary living abroad

If your policy beneficiaries are living abroad, they may or may not have access to the death benefits. The insurance provider determines if the death benefit can be provided to an international beneficiary. Your insurer will have more information about your particular policy.

No beneficiary named

If no beneficiary is named on your life insurance policy, or if your designated beneficiaries die before you, the policy death benefits are paid to your estate. Any heirs to your estate may have to pay taxes on the money received from the estate.

Finding beneficiary information

Identifying your beneficiaries

If you have a life insurance policy but do not remember the designated beneficiaries, you should contact your life insurance company. The insurance company that provides your life insurance policy will be able to review the policy beneficiary designations.

Finding out if you’re a beneficiary

If you are unsure whether you are a life insurance policy beneficiary, you’re not alone. A recent study by Consumer Reports found that 1 in every 600 people is a beneficiary of an unclaimed life insurance policy.

Some state insurance departments — like Texas — have policy locator tools that can help you find information about a deceased person’s life insurance policy. If you submit an inquiry and it turns out that you’re a beneficiary, regulators may share information about the policy with you.

In addition to personal research, some states legally require insurance companies to use Social Security data to find policyholders who have died and to search for the beneficiaries of the policies.

Beneficiary taxes

According to the IRS, if you receive the life insurance policy proceeds, in most cases the money is not includable in your gross income and does not have to be reported.

However, any interest payments you receive on the death benefits are taxable and need to be reported similarly to other interest payments. Several exclusions to this rule can be found on IRS.gov.