Life insurance is a financial product that provides a death benefit to your loved ones if you pass away. When you purchase a life insurance policy, you choose a beneficiary or beneficiaries who will receive the death benefit. Your beneficiary can be any person or entity you choose, such as a spouse, child, trust, or charity.
Naming your spouse or child as your life insurance beneficiary is a common choice. After all, they are the people you love and care about most. However, it is essential to carefully consider your options before deciding.
This article will discuss all you should know about choosing a beneficiary for your life insurance especially when it comes to deciding between a child and a spouse.
Who is a Life Insurance Beneficiary?
If you die while your life insurance policy is still active, your beneficiary will be anyone who receives the death benefit. As a result, selecting a beneficiary is an important step in owning a life insurance policy. After all, it is likely that your beneficiary is the reason you have life insurance in the first place.
However, deciding who receives the payout may be more complicated than you think—state laws and policy rules can influence or even limit your options.
Who Is Eligible to Be a Life Insurance Beneficiary?
A life insurance beneficiary can be almost anyone, including individuals, organisations, and trusts. Here are some examples of common life insurance beneficiaries:
- A person, such as your spouse.
- Multiple people, like your children.
- A trust.
- Your estate.
- A non-profit organisation.
- A legal entity, like your company.
Some insurers limit the number of beneficiaries you can name. Be selective when compiling your list if your policy has a limit.
Why Name Your Spouse or Child as Your Life Insurance Beneficiary?
There are several reasons why people choose to name their spouse or child as their life insurance beneficiary:
- Love and care: Most people love and care about their spouses and children more than anyone else in the world. By naming them as beneficiaries of their life insurance policy, they can provide them with financial support in the event of their death.
- Financial stability: A life insurance death benefit can help your spouse or child maintain their financial stability if you pass away. This can be especially important if they rely on your income to cover household expenses or if they have debt that needs to be repaid.
- Peace of mind: Knowing that your spouse or child will be financially secure if you pass away can give you peace of mind. It can also allow you to focus on living your life without worrying about what will happen to your loved ones if you die.
What Are the Drawbacks of Naming Your Spouse or Child as Your Life Insurance Beneficiary?
There are a few drawbacks to naming your spouse or child as your life insurance beneficiary:
- Divorce. If you divorce your spouse, they may still be entitled to the death benefit from your life insurance policy, depending on the terms of your divorce decree.
- Remarriage. If you remarry, your new spouse may not be entitled to the death benefit from your life insurance policy unless you specifically designate them as a beneficiary.
- Minor children. If you name your minor children as beneficiaries of your life insurance policy, a guardian will need to be appointed to manage the death benefit on their behalf. This can be a complex and time-consuming process.
Beneficiary Selection Guidelines
When you purchase a life insurance policy, you can name a beneficiary or multiple beneficiaries. If you do not name a beneficiary, the death benefit is distributed to your estate. This can make it more difficult for any loved ones who are financially dependent on you to access those funds after your death. Payouts for policies with no beneficiaries are frequently delayed because a probate court must determine where the funds should go.
Most people name their spouse, significant other, children, or parents as beneficiaries, but there is no rule that says who can be your beneficiary. You could choose a sibling, a close friend, or even someone you trust. When deciding on your life insurance beneficiaries, consider where the funds would have the most impact in the event of your death.
It is critical to remember that your life insurance policy is distinct from your will or other aspects of your estate; even if you have a will, you must name a beneficiary for your life insurance policy.
#1. You Have the Option of Refusing to Name Beneficiaries
It is not required to name a beneficiary. If there is no beneficiary on your life insurance policy, the probate court will distribute the proceeds as part of your estate. However, we do not recommend this option because it makes it more difficult for your loved ones and dependents to access the required funds.
#2. There Can Be Multiple Beneficiaries
You may name more than one primary or contingent beneficiary. You could name your spouse as the primary beneficiary if you’re married. If you have adult children, you could name them contingent beneficiaries, who would receive the payout if your spouse died.
#3. Some States Require You to Name Your Spouse as a Beneficiary
If you live in a community property state, you may be required to name your spouse as a beneficiary. Even if you name someone other than your spouse as a beneficiary, your spouse may still be entitled to 50% of the proceeds.
#4. Minors Are Eligible to Receive Benefits
Many parents purchase life insurance policies to help provide for their children if they die. Minor children can be named as beneficiaries, but they will not be able to receive the benefit directly if they are under the age of 18. As a result, it is usually best to name a spouse or another caregiver as the beneficiary.
#5. Charities and Organizations Can Be Beneficiaries
While naming a loved one as a beneficiary is common, it is not required. A charity or other organization can also be named as a beneficiary. This could be a good option if you’re confident that your loved ones would be financially secure if you died.
#6. Pets Cannot be Beneficiaries
A beneficiary must be legally capable of accepting an inheritance and signing documents. As a result, you are not permitted to name your pet as a beneficiary of your life insurance policy. You can, however, create a trust and name the pet’s guardian as the beneficiary.
#7. You Must Have Consent
If you want to name yourself as a beneficiary on someone else’s life insurance policy, you must first get their permission. You must also have an insurable interest, which means that you rely on the individual and would suffer financial consequences if they died. In most cases, having an individual, such as a parent, take out a policy on their behalf and name you as a beneficiary is a good idea.
#8. Beneficiary Lists Must Be Updated Manually
If you have a life-changing event, such as a divorce, your beneficiary list will not be automatically updated. You must manually change the beneficiary of your policy. You may want to keep an ex-spouse as a beneficiary in some cases. For example, if they would care for your children if you died, you may want to keep them on your policy.
#9. Certain Beneficiary Designations Are Irreversible
Some beneficiary designations are irrevocable, which means they cannot be changed unless the beneficiary agrees to waive their right to do so. Some policyholders choose to name specific family members as irrevocable beneficiaries, such as dependent children. However, you should carefully consider whether you truly need to name someone as an irrevocable beneficiary, as this can be difficult to change in the future.
Types of Beneficiaries
Beneficiaries are classified into two types: primary beneficiaries and secondary or contingent beneficiaries. The primary beneficiaries are the primary recipients of an insurance policy. Secondary or contingent beneficiaries receive a death benefit only if the primary beneficiary or beneficiaries are unable to do so. If your primary beneficiary is no longer alive, naming a contingent beneficiary can help ensure that your policy’s death benefit goes where you want it to go.
A. Primary Beneficiary
The first beneficiary of your life insurance policy is your primary beneficiary. You can have multiple primary beneficiaries. If you have two younger siblings, for example, you could name both as primary beneficiaries. The primary beneficiaries are the people who will receive your life insurance payout first.
B. Secondary or Contingent Beneficiary
If your primary beneficiary dies, your contingent or secondary beneficiaries will receive a payout from your life insurance policy. You could, for example, name your spouse as the primary beneficiary and your children as the secondary beneficiaries. If your spouse dies before you, your children will receive the payout as secondary beneficiaries if you die.
Rules for Death Benefit Payouts
Beneficiaries must first file a claim with the life insurance company in order to receive a payout from a life insurance policy. The primary beneficiary is the first person to receive these funds. Secondary or contingent beneficiaries may receive the benefit if the primary beneficiary is no longer alive. Minors cannot receive death benefits, but if a minor is designated as a beneficiary, a custodian can oversee the funds.
#1. To Receive a Death Benefit, Beneficiaries Must File a Claim
To receive a payout, beneficiaries must file a claim with your insurer. The procedure is not automated. If a policy has more than one beneficiary, each beneficiary must file a separate claim to receive their share of the funds.
#2. The Primary Beneficiary Is the First Person (Or Persons if There Are Multiple Primary Beneficiaries) To Receive the Death Benefit
If a life insurance policy has a designated primary beneficiary, they will be the first in line to receive the death benefit. A secondary or contingent beneficiary may file a claim if the primary beneficiary dies.
#3. The Money Is Distributed to the Contingent Beneficiary if the Primary Beneficiary Dies
Contingent beneficiaries are only eligible for a payout if the primary beneficiary is unable to receive one. In most cases, this indicates that the primary beneficiary has died. They could also be unreachable or have declined the payment.
#4. You Can Direct How the Funds Are Distributed
Policyholders can direct how their life insurance payouts are distributed. For example, you could divide the payout equally among the named primary beneficiaries. On the other hand, you might want to assign a percentage to each beneficiary. For example, 50% of a payout could go to your spouse and 50% to your children.
#5. Minors Are Not Eligible for Death Benefits
Many people buy life insurance in order to provide for their families in the event that they die. Minors can be named as beneficiaries on a life insurance policy, but they cannot receive death benefits until they reach the age of 18. Instead, the proceeds will be distributed to their legal guardian. You may also be able to establish a trust to ensure that your assets are used to support your children, grandchildren, or other dependent minors.
How Payouts Are Divided Among Beneficiaries
You have several options for dividing the payout among multiple beneficiaries. You may want to divide it equally among multiple beneficiaries, divide it by a percentage, or split the payment so that it branches off to younger generations if one of your beneficiaries dies. The good news is you can change how your life insurance payout is divided among beneficiaries at any time.
#1. Per Capita
If you choose to split your policy’s benefit per capita, you are splitting it “per head” so that each beneficiary receives the same amount. This might be a good idea if you’re naming your three adult children as beneficiaries, for example. If a beneficiary dies, the payout is distributed equally among the remaining beneficiaries.
#2. Per Stripes
If you decide to divide your policy’s payout per stirpes, it means that a death benefit will be passed down a family lineage. Assume you name your three adult children as the primary beneficiaries of your life insurance policy. If one of your children dies, their children (your grandchildren) are entitled to their parent’s death benefit.
#3. Particular Percentage
You may want to allot different percentages of the death benefit to different beneficiaries in some cases. You might want your spouse to receive 70% of the death benefit and your parents or children to receive 30%. This method of dividing the death benefit is commonly used when you have multiple beneficiaries with varying levels of financial reliance on you.
Why Do I Have to Designate a Beneficiary?
Many financial products, including life insurance benefits, are not generally governed by your will, so the only way to ensure that your policy’s benefits are distributed as you intend is to name a beneficiary for all of your policies and accounts.
Although naming a beneficiary is not required, it is usually the reason people buy life insurance in the first place—to provide a benefit to those they care about. When you die, your other assets may also benefit the people you care about.
What if I Don’t Designate a Beneficiary?
If you do not name a beneficiary, it may be unclear who is entitled to the funds, which may cause the benefit payment to be delayed.
Suppose you die without naming a beneficiary for a retirement account, such as a 401(k). In that case, your assets will likely be held in probate — a legal process in which a court must sort out your financial situation and determine how to distribute your assets.
If you do not name a beneficiary, most life insurance policies have a default order of payment. If the policy owner is not the insured person and is still alive, the death benefit will be paid to the owner’s estate; otherwise, it will be paid to the owner’s estate. In the case of group insurance policies, the order usually begins with your spouse, then your children, then your parents, and finally your estate.
If your policy does not specify a default order, the payout may be paid to your estate or held in probate.
In either case, the probate process can be time-consuming and complicated, and it may take years before your loved ones can access your assets — something you can avoid if you name them as beneficiaries.
Is It Possible to Change the Beneficiaries?
Most life insurance policies and other financial accounts allow you to change the beneficiaries at any time.
Changing beneficiaries is usually simple; the difficulty is often remembering to do so. To find out how, contact your employer, a financial professional, or a financial services company.
When Should You Update Your Beneficiaries?
Beneficiary changes are frequently overlooked after a divorce, remarriage, or the death of a loved one who was named as one of your beneficiaries.
In some jurisdictions, divorce may revoke a designated spouse’s right to receive a benefit, so you may need to re-designate with an updated relationship (from “spouse” to “ex-spouse”) if you want the designation to remain in effect.
Using your employer’s annual benefits enrollment to revisit the details of your accounts and insurance policies is an easy way to remember to keep your beneficiaries up to date.
If your employer does not provide benefits, set a date that you will remember each year—May Day, Labor Day, or your birthday—and spend ten minutes reviewing your accounts and policies.
Special Circumstances for Beneficiary Changes
In some cases, such as under the terms of a divorce or if you made an “irrevocable designation,” you may not be able to change or name a new beneficiary without the consent of your current beneficiary.
Similarly, if you have given someone else ownership of an account or a life insurance policy, you are no longer the owner and cannot change the beneficiary.
In general, you, your financial advisor, and your attorney will know if any of these scenarios apply to you.
Is It Possible for the Wrong Person to Receive Your Benefits?
If you fail to update your beneficiaries or make a mistake in documenting them, someone other than the intended beneficiary may receive your assets or policy proceeds. This is why it is critical to designate and remember to update beneficiaries carefully.
If you are concerned about making a mistake when naming your beneficiaries, consult a financial professional or an attorney to ensure your wishes are carried out.
Who Is Eligible to Be a Life Insurance Beneficiary?
Anyone can be the beneficiary of a life insurance policy. There are no restrictions on who can be named as a beneficiary, including a spouse, child, relative, or friend, as well as charities, trusts, and estates. Furthermore, the two lists can and should overlap because life insurance beneficiaries are distinct from those named in your will.
Keep in mind that in some states, you must name your spouse as the primary beneficiary, with at least 50% of the benefits going to them. You may not be able to name someone other than your spouse as a beneficiary unless you obtain documented consent from them.
8 Tips for Selecting a Life Insurance Beneficiary
#1. Choose the person who is most reliant on your income
In general, the person or people whose financial situation would be the most affected by your death should receive the insurance proceeds.
#2. Beneficiary Age
The first thing to consider when naming a beneficiary is the person’s age. If he or she is under the age of 18, additional steps must be taken to ensure that life insurance beneficiary laws are followed. If you want to name a minor as a beneficiary, you must usually appoint a guardian to manage the money until the minor reaches the legal drinking age. It is critical to choose a guardian in whom you have sufficient trust to manage the money left to your children.
#3. Decide How It Will Be Distributed
If you have a life insurance policy, you can name more than one person to receive death benefits. If you choose this option, you must decide how to distribute the proceeds of your life insurance policy. There are two primary options for how benefits will be distributed.
#4. Inform Your Beneficiary That They Have Been Chosen
People you choose to receive benefits from your life insurance should be aware of their position and the amount of the benefit so that they can act appropriately. Inform not only family members, but any business partners who may benefit as well.
#5. Pick a Backup
What if your primary beneficiary dies before you, is unable to be located, or refuses to accept the proceeds? To resolve this, you should always have a backup beneficiary. If you name a secondary beneficiary, your death benefit will be paid directly to that person.
#6. Adjust beneficiaries as your life changes
Life isn’t static, and just as you should update the policy to reflect changing circumstances, such as a divorce, so should your list of beneficiaries. Plan yearly life insurance reviews with your financial advisor or insurance agent.
#7. Use of Precise Wording
Beneficiaries can be listed alphabetically. You can also label them by class, such as “grandchildren of the insured.” Complications can occur regardless of strategy. Assume you list the names of your grandchildren on your insurance. However, you did not update it when your youngest grandchild was born. If this is the case, they will not be entitled to a share of your estate’s earnings upon your death. In contrast, if your beneficiary is “all children born from this marriage,” an adopted child may not receive a share of the inheritance.
#8. Align your Will with the Beneficiary of Your Life Insurance
Beneficiary designations on your life insurance policy take precedence over wills almost always. You should make sure that your will and life insurance policy are in sync so that your wishes are met. Furthermore, your will cannot change your life insurance coverage. As a result, naming someone as a beneficiary of your life insurance policy ensures that the death benefit is paid to them regardless of what is in your will.
What Happens if There Is No Beneficiary on the Life Insurance Policy?
If no beneficiary is named, the proceeds of your life insurance become part of your estate. The remainder of your assets distribute the proceeds of your life insurance. Your estate may need to go through Probate, which can be expensive and time-consuming for your heirs.
How to Change the Beneficiary of a Life Insurance Policy
Changing your beneficiary is simple. Change the beneficiaries on your life insurance policy by contacting your insurance company. A beneficiary change form must be submitted online, on paper, or by phone. The form will request personal information about your recipient, such as contact information.
This method becomes complicated only when there are irrevocable beneficiaries. This is due to the fact that you cannot remove or change the designated payment for irreversible beneficiaries without their permission.
The most important aspect of having life insurance is choosing a beneficiary – the person or entity who receives the benefits after the insured dies. Choosing this recipient may not be an easy task. After all, policy guidelines may limit your options. Furthermore, updating or changing your beneficiary has its own set of procedures. As a result, before you sign a policy, you should thoroughly understand how your life insurance company handles beneficiaries.