How to Choose a Beneficiary for Life Insurance

Life insurance is a great safety net to ensure that loved ones and family members are cared for in the event of your death — whether untimely or natural. But going through the steps of the process can be tedious. After qualifying for a policy at a monthly premium price you can afford, you may be wondering: “who should my life insurance beneficiary be?” While it may be obvious for some people, in other situations it can be a little more difficult to determine who should receive the financial payout upon your death.  Do not worry — there are a few things to know that will help narrow down the best recipient.

What is a life insurance beneficiary?

Life insurance is a tool that helps you care for personal affairs, funeral expenses and any dependents you have upon dying. In fact, most people have a particular person, be it a spouse, child, parent or friend, in mind when they make the decision to purchase life insurance. Doing so is often one step of estate planning that ensures you can take care of them even when you are no longer living. But to do so, you must legally designate a person to receive the life insurance payout. This person is the beneficiary.

The beneficiary is able to handle the life insurance funds and use them to pay for funeral and other expenses related to your estate. They can also use this money to cover living expenses or other costs, which is common in situations where a dependent spouse is the beneficiary.

Are there different kinds of beneficiaries?

When you are filling out your life insurance details, you may notice that there are two different types of beneficiaries listed: primary and contingent. It is important to understand how these kinds of beneficiaries work.

Primary beneficiary: The person you list as the primary beneficiary will be the initial person contacted to receive your life insurance payment. This person, in most cases, will receive the funds, so it is important to put your first pick here. In many cases, spouses or significant others are listed as primary beneficiaries.

Contingent beneficiary: The second person you list is somewhat like a backup beneficiary, in that if the primary beneficiary is deceased or cannot be found after your death, another person of your choosing will receive the life insurance payout. Choosing a contingent beneficiary is important, especially if you chose a spouse or significant other as your primary beneficiary. This ensures that if something happens to both of you, a person you designate will handle the life insurance funds. Common contingent beneficiaries are parents, siblings or adult children.

Who cannot be a beneficiary?

When you are narrowing down your beneficiary short list, it is good to know that some people cannot receive life insurance funds. In most cases, minor children (under the age of 18 or 21 depending on the state) cannot be beneficiaries. If you choose to list a child as a beneficiary, it is important to also list an adult legal guardian who would handle the payout on your child’s behalf.

In addition, incarcerated beneficiaries may not receive payouts, either. Many states have laws that prevent life insurance payments from going to people in jail, meaning that your life insurance funds could instead be handled by the person managing your estate.

Do I have to pick a person as my beneficiary?

Choosing a specific person to be a beneficiary can be difficult, especially if you have no next of kin or multiple children. In these cases, it is possible to designate a charity, trust or simply your estate as the beneficiary. Some people without heirs choose charities as their beneficiaries, which allows them to support a cared for cause even after death. In other cases, especially with large payouts or minor children, you may want to choose a trust as the beneficiary to ensure that funds are used appropriately and fairly. Designating your estate as beneficiary is also an option, and allows whomever is handling your estate to use the funds as described in your will or estate plans.

Do I need to have my beneficiary’s approval?

In many situations, you do not need to have a person’s approval to list them as a beneficiary. This allows you to choose whomever you want to receive the life insurance payout. But, beware if you consider designating someone other than a spouse as a primary beneficiary. Some states, such as Arizona, Louisiana, Nevada and Wisconsin, give legal claim to spouses who are not listed as beneficiaries. This means that if you designate a friend or family member as the beneficiary, your spouse could still have access to a portion of the payout upon your death.
Even if you choose a beneficiary without their permission, it is important to let them know you have a life insurance policy. Doing so can help expedite the payout process later down the road.

 What happens if I outlive my beneficiary?

Some people outlive the person designated as their life insurance beneficiary. This is one reason why life insurance companies require you to designate a contingent beneficiary so that in the case of a primary beneficiary’s death, funds will still go to the person of your choosing.

After your primary beneficiary’s death, you have the option of updating your beneficiary information. This means you can choose a new person to receive the life insurance funds. Keeping this information up to date can help with promptly dispersing funds.

Can I change my beneficiary?

It is important to know that you have the option to change your beneficiary, and life insurance companies will often suggest keeping your beneficiary information up to date. Many people look to change beneficiaries after major life events such as weddings, divorce or the death of a spouse. Doing so is especially important after divorce if the beneficiary listed is an ex-spouse, who legally would have the right to funds if you did not update your life insurance policy. Choosing to change your beneficiaries may also be an option after the birth or adoption of a child, especially if you decide to create a trust to ensure their case in case you were to unexpectedly pass.

In any case, it is a good idea to always be specific with whomever you choose to list as a beneficiary. Simply listing “wife” or “spouse” can lead to complications if you divorce later down the road, or writing in “child” can make it difficult to determine which children receive funds after your death.