Who Should Be the Beneficiary of My Life Insurance?

Your life insurance beneficiary is the person, people or entity who receives the death benefit, and choosing well is just as important as choosing the right amount of coverage. For most married people, the primary beneficiary is a spouse, with children or a trust named as backup. The details, like naming a contingent beneficiary and planning for minor children, are what keep the money going where you intended.

Quick answer: Name at least one primary beneficiary and at least one contingent (backup) beneficiary. Avoid naming young children directly or leaving the field blank, since either can send the money through a court process. Review your choices after any marriage, divorce, birth or death in the family.

Primary and contingent beneficiaries

Every policy has room for two levels of beneficiaries:

• Primary beneficiary. The first in line. If they're alive when you pass away, they receive the benefit.
• Contingent beneficiary. The backup. They receive the money only if every primary beneficiary has already passed away or can't be found.

You can name more than one person at each level and split the benefit by percentage. For example, a parent might name a spouse as 100% primary and then two children at 50% each as contingent.

Leaving the contingent line empty is one of the most common gaps we see. If your only primary beneficiary dies before you, or at the same time in an accident, the benefit may be paid to your estate instead. That can mean delays, court costs and less control over who ends up with the money.

Choosing a life insurance beneficiary: common options

There's no single right answer, but here's how the usual life insurance beneficiary choices compare:

Many families in Alpharetta and around North Fulton end up with a spouse as primary and either the children or a trust as contingent. Your situation may call for something different.

The problem with naming minor children

It feels natural to list your kids. But in most cases an insurer can't pay a large sum directly to someone under 18. If you name a minor, a court may need to appoint someone to manage the money until the child is an adult, and that person may not be the one you would have picked. When the child does come of age, they may receive the whole amount at once.

Parents usually have better options:

• Name a trust for the children, with a trustee you choose and rules for when money is released.
• Name a custodian for the child, if your carrier and state allow it, so a trusted adult manages the funds.
• Name your spouse as primary, knowing they'll use the money for the kids, and set up a trust as the contingent.

An estate planning attorney can help you decide which fits. If you're starting a family, our guide for young families covers other coverage decisions too.

Special situations to plan for

Some families need extra thought before naming a life insurance beneficiary:

• A dependent with special needs. A direct inheritance could affect eligibility for certain government benefits. Many families name a special needs trust instead.
• Blended families. If you want children from a prior relationship to receive part of the benefit, name them directly or use a trust. Don't assume a new spouse will divide the money the way you would.
• Divorce. Your ex-spouse can still collect if they're still listed. Check any divorce decree, since some require you to keep a former spouse as beneficiary for a set time.
• Business partners. If a policy funds a buy-sell agreement, the beneficiary should match what the agreement says.

You may also see the terms per stirpes and per capita. Per stirpes means that if one of your children passes away before you, their share goes to their own children. Per capita usually means the share is split among the surviving beneficiaries instead. It's a small checkbox with a big effect, so ask your agent to explain how your carrier words it.

Revocable vs irrevocable beneficiaries

Most beneficiaries are revocable, meaning you can change them any time without anyone's permission. An irrevocable beneficiary has to agree before you make certain changes, such as switching beneficiaries or borrowing against cash value. Irrevocable designations sometimes come up in divorce settlements or business deals. Unless there's a specific reason, most people keep their designations revocable.

Keep your designation current

Your beneficiary form overrides your will. If your will says one thing and your policy says another, the policy usually wins. That's why reviewing your life insurance beneficiary should be part of every big life change:

• Marriage, divorce or remarriage
• The birth or adoption of a child
• The death of a beneficiary
• Setting up a new trust or will
• Changing jobs, if you have coverage through work

Make sure each beneficiary is listed with a full legal name and, if your carrier asks, a date of birth or other identifying details. That makes it much easier for the insurer to find and pay the right person.

Frequently asked questions

Can I name more than one beneficiary?

Yes. You can name several primary and several contingent beneficiaries and split the benefit by percentage. Just make sure the percentages at each level add up to 100%.

What happens if I don't name a beneficiary?

The benefit is typically paid to your estate. That can mean the money goes through probate, which takes time and may expose it to creditors before your family sees it.

Can I change my beneficiary without telling them?

For a revocable beneficiary, yes. You usually just submit a change form to the insurance company. Confirm that the carrier has processed it and keep a copy for your records.

Do beneficiaries pay taxes on life insurance?

Death benefits paid to a named beneficiary are generally income-tax-free under federal law (IRC §101(a)). If the benefit is paid in installments, the interest portion is taxable. Larger estates may have other considerations, so talk to a tax professional.

Next step

Not sure who's listed on your current policy, or whether your backups are in place? Bring your policies to a free policy review at our downtown Alpharetta office, by phone or by video, or call 470-777-7460. We'll walk through every beneficiary line with you and show you how to update anything that's out of date.

This article is for general education and is not tax, legal or investment advice. Coverage, features and pricing vary by carrier, state and individual underwriting.