Life Insurance: How to Name Beneficiaries and Why It Matters

Designating your beneficiaries is a crucial step in owning life insurance or any financial product. Beneficiaries are the people or entities you choose to receive the benefits from your policy or accounts when you pass away. Life insurance is designed to provide financial support to your loved ones after you’re gone, but ensuring it works as intended requires careful thought about who should receive the payout (or death benefit).  

 

As your life evolves—through marriage, children, divorce, or other major changes—it’s essential to keep your beneficiary designations up to date. Neglecting this step can lead to unintended consequences or delays in getting the money to those who need it most.  

 

Here’s some basic information to help you navigate beneficiary designations and make informed decisions.

 

What is a Beneficiary?  

 

A beneficiary is the person or entity you designate to receive the benefits from your financial products after you pass away.  

 

• For life insurance policies: This means the death benefit, which is the payout your policy provides.  
• For retirement or investment accounts: It refers to the remaining balance of your assets in those accounts.  

 

Primary and Contingent Beneficiaries  

 

There are two types of beneficiaries: primary and contingent.

 

Primary Beneficiary:  

 

The primary beneficiary is the first in line to receive the death benefit from your life insurance policy. This is often a spouse, child, or other family member, though it can also be a friend, trust, or organization.  

 

Contingent Beneficiary:

 

A contingent beneficiary, also known as a “secondary” beneficiary, is the backup. If your primary beneficiary passes away before you or at the same time, the contingent beneficiary steps in to receive the death benefit.  

 

Naming both primary and contingent beneficiaries ensures your policy’s benefits go to the right people, even in unforeseen circumstances.

 

Do I Have to Name a Life Insurance Beneficiary?  

 

Technically, you can take out a life insurance policy without naming a beneficiary, but it’s not recommended. If you pass away without a designated beneficiary, the death benefit will become part of your estate—the total value of all your money, property, and belongings left behind.  

 

Here’s why this can be problematic:  

 

• Probate Delays: The payout will go through the probate process, which can be time-consuming and expensive, delaying access for your loved ones.  
• Creditor Claims: In some states, creditors can claim the money from your estate, leaving less (or nothing) for your family.  

 

To avoid these issues, it’s almost always better to name a beneficiary. This ensures that the payout goes directly to the people or entities you intend, bypassing probate and protecting the funds from creditor claims.  

 

How to Name a Beneficiary  

Naming a beneficiary is typically a straightforward process. Here are the steps:  

 

1. Use Forms from Your Provider

 

Most financial services companies offer forms or online tools for designating beneficiaries. This information will be stored with your account or policy details.  

 

2. Employer-Provided Insurance and Accounts

 

If your life insurance or retirement accounts are provided through your employer, they likely keep your beneficiary information on file for all employee benefits, including life insurance, retirement plans, and profit-sharing plans.  

 

3. Work with a Financial Professional

 

If you have life insurance or investment accounts through an insurance advisor, check with them to confirm your beneficiaries are correctly documented and up to date.  

 

Taking the time to designate beneficiaries ensures your financial assets are distributed as you intend and provides peace of mind for you and your loved ones.

 

Can Anyone Be Named as a Beneficiary?  

 

Yes, your beneficiary can be almost anyone, including a person, a charity, a trust, or even your estate. However, there are a few considerations to keep in mind:  

 

• State Laws: Some states require you to name your spouse as your primary beneficiary, granting them at least 50% of the benefit unless they provide written permission to name someone else.  
• Provider Rules: Certain financial service providers may have restrictions on who can be named as a beneficiary, so it’s essential to check their policies.  

 

Before naming a beneficiary, ensure you understand the rules in your state and with your provider to avoid complications.  

 

Immediate Family as Beneficiaries  

 

Your immediate family members—spouse, children, or other dependents—are often the first choice for beneficiaries, especially if they rely on you financially.  

 

• Splitting Benefits: You can divide the death benefit among multiple beneficiaries as long as the total equals 100%. For instance, you might allocate 50% to your spouse and 25% to each of two children.  
• Trustworthy Adults: Some people choose one adult, like a spouse, to receive the benefit and trust them to use it for other family members or loved ones.  

 

Naming Minors as Beneficiaries  

 

Children under 18 can be named as primary or contingent beneficiaries, but there are limitations:  

 

• Guardianship: If you pass away while your child is still a minor, the payout will often go to their legal guardian or into a court-appointed custodial account until they reach adulthood.  
• Trusts for Minors: Many parents create a trust to manage life insurance proceeds for their children. You can name the trust as the beneficiary, ensuring funds are used for their benefit (e.g., education or living expenses) until they reach a specified age.  

 

Creating a trust or custodial arrangement can provide better control over how the money is managed and accessed. Speak with an attorney or financial professional to set up the best option for your circumstances.  

 

Taking the time to choose the right beneficiary arrangement ensures your assets are distributed as intended and helps protect the financial future of those you care about most.  

 

When to Change a Beneficiary  

 

Life changes often prompt the need to update your life insurance beneficiaries. Common reasons include:  

• Marriage or Divorce: Adding or removing a spouse as a beneficiary.  
• Birth or Adoption of a Child: Include a new family member in your coverage.  
• Major Life Changes: Changes in your financial or personal situation may affect your decision.  

 

These events might also be a good time to review your life insurance coverage to ensure it meets your current needs.  

 

Types of Beneficiaries  

 

Before making changes, understand the two types of beneficiaries:  

 

1. Revocable Beneficiaries: This can be changed at any time by the policyholder without needing anyone’s consent.  

 

2. Irrevocable Beneficiaries: Cannot be changed unless specific conditions are met (e.g., the beneficiary passes away or agrees to the change).  

 

If you think you may need flexibility to update your beneficiaries in the future, verify that your policy allows it before purchasing.  

 

Legal Considerations  

 

• Divorce Agreements: Some divorce settlements may require you to maintain a former spouse or child as an irrevocable beneficiary. In such cases, your ability to change beneficiaries may be limited.  
• Check Your Policy: Read your insurance policy carefully or consult a lawyer to ensure compliance with any legal or contractual obligations before making changes.  

 

How to Change a Beneficiary  

 

Changing a beneficiary is typically a straightforward process:  

 

1. Obtain the Form: Contact your insurance company for a “beneficiary designation form.
2. Complete and Submit: Fill out the form with the updated beneficiary information and return it to your insurance provider.  
3. Confirmation: Once processed, the new beneficiary designation will take effect.  

 

Keeping your beneficiaries up to date ensures your life insurance benefits are distributed according to your wishes, avoiding complications or delays for your loved ones.