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Summary

There are a number of factors to consider when choosing a beneficiary or beneficiaries of a life insurance policy. For instance,

Don't rely on the insurance company to review the beneficiary designation for you. If you have a question how to word what you want to do, speak with an attorney or financial planner.

If there could be a question whether you are currently competent to name a beneficiary, consult your doctor.

If you have or are going to create a durable power of attorney (see Durable Power of Attorney), review information about your life insurance with the person who will act with your power of attorney if you become incapacitated.

Review your designation of beneficiary at least once a year to be sure it is continues to be up-to-date. Tax time is a good time to do this.

NOTE: You must be mentally competent to designate a beneficiary of a life insurance policy. If there is a question about whether you are mentally competent when you name or change a beneficiary, speak with your doctor to find out if he or she is willing to testify that you are competent if the question is raised. If there are still questions, speak with an attorney.

You May Name More Than One Person As Beneficiary Of A Life Insurance Policy

In fact, you may generally name as many beneficiaries as you would like, subject to the terms and conditions of the policy. We know of one policy that had more than 20 beneficiaries listed. Beneficiaries who will split the proceeds are called "joint beneficiaries." 

If you name more than one person as beneficiary for a policy:

  • State how the policy proceeds are to be distributed among the beneficiaries. You can simply indicate that the proceeds are to be distributed equally, meaning that each named beneficiary would receive an equal share.  Alternately, you may indicate what percentage of the proceeds each named beneficiary will receive. 
  • It is preferable to indicate how to divide the money by using percentages as opposed to dollar amounts in case there are even minor adjustments to the amount the insurance company pays. For example, if the death benefit is $100,000, and you want to give the money equally to four beneficiaries named W, X, Y and Z, list them as W 25%, X 25%, Y 25% and Z 25% rather than W $25,000, X $25,000, Y $25,000 and Z $25,000. If the death benefit ends up being $95,000, or over $100,000 with dividends and accrued interest, and you use specific dollar amounts instead of percentages, there may be an expensive time delay deciding what to do.
  • Mention what would happen if one of the beneficiaries dies before you.  For example, if you leave a policy 50% to Jack and 50% to Jill, what happens if Jack dies and then you do? Does Jill get it all, or do you want Jack's share to go to his kids or to someone else entirely?  The designation could read, something like: "50% to Jack and 50% to Jill, equally or all to the survivor." This would mean that if both Jack and Jill were alive when you die, they would each receive 50% of the death benefit. However, if one died before you, the other would receive everything. You could say: "50% to Jack and 50% to Jill, equally or per stirpes."  "Per stirpes" is a legal term meaning by the root. If you leave an asset this way, the deceased beneficiary's share passes to his or her beneficiaries instead of to the other named beneficiary. In this case, if Jack died before you, Jack's kids would  each receive an equal share of Jack's portion.

You May Name A "Class" Of Individuals As Beneficiary Of A Life Insurance Policy

Instead of leaving the proceeds of a life insurance policy to a particular person, you may leave them to a class of individuals. For example, you may name "all of my current and future children" as beneficiaries. 

The advantage to naming children beneficiaries as a class rather than by name is that children you have or adopt after you buy the policy can be automatically added as a beneficiary. If you name your children as joint beneficiaries by name, you need to add new children as additional beneficiaries by name when they are born or adopted. 

If you name a class as beneficiary, be careful to include the people you care about and not any others.  For example, Shana has children of her first marriage and step children from her second marriage. She could specify "all children born to me" which would only include the children from her first marriage, or she could say "all my children including step children."  Using the words "born to me" would exclude adopted as well as step children.

You May Have Primary And Contingent Beneficiaries

You can name beneficiaries one after the other. If something happens to one person, the next person becomes the beneficiary.

A "primary beneficiary" is the individual named to receive the proceeds of the life insurance policy upon your death.

A "contingent beneficiary" is the person who receives the proceeds upon your death if the primary beneficiary were to die at the same time as you or before you. 

For example, if you leave the proceeds of your life insurance "To Jane, but if Jane is not alive at the time of my death, to Sally", then Jane is the primary beneficiary and Sally is the contingent beneficiary.

You may even name a person who is contingent to the contingent beneficiary in the event that the primary and first contingent beneficiaries both predecease you.

If you are leaving the proceeds to an individual, it is always good idea to name a contingent beneficiary in case:

  • The primary beneficiary dies before you and you don't get around to changing the named beneficiary, or
  • The primary beneficiary dies at the same time as you -- say in the same auto accident.

If you don't name a contingent beneficiary, you can get into the question whether the money is supposed to go to the beneficiary's estate or to yours. Answering that question could involve a lengthy, expensive, battle in court.

A Beneficiary Of A Life Insurance Policy May Be "Revocable" Or "Irrevocable"

A revocable appointment of a beneficiary means that you can change your mind and "revoke" the beneficiary and appoint a new beneficiary whenever you like. Generally, you don't have to state that a beneficiary designation is revocable if that is your intent.

Beneficiaries are assumed to be named revocably, unless you specify to the contrary.

If there is a revocable appointment of a beneficiary, the beneficiary does not get any rights or interest in the policy or the proceeds during your lifetime. For practical purposes, that means if you change the identity of beneficiaries from X to Y, X can't do anything about the change.

When you name someone as an "irrevocable" beneficiary, you can't change the identity of the beneficiary. By naming a beneficiary irrevocably, you give the beneficiary certain rights and interests in the policy that you cannot revoke on your own. The only way you can change the identity of the beneficiary is if the irrevocable beneficiary agrees to allow the change. Additionally, you cannot get a loan using the policy as collateral or sell the policy in a Viatical or Senior Settlement without the consent of the irrevocable beneficiary. For more information, see Commercial Loans Against Life Insurance, Friendly Loans Using Life Insurance As Collateral, Viatical Settlements and Senior Settlements.

If you wish to name a beneficiary irrevocably, you must state that the beneficiary is being so named.

Standard advice is not to name a beneficiary irrevocably unless there is a requirement or specific reason to do so, such as part of a divorce decree or loan agreement. Naming an irrevocable beneficiary takes away the flexibility you may need due to ever changing, unanticipated circumstances.

Different Types Of Beneficiary Designations May Be Combined

For example, you may have joint beneficiaries as well as contingent beneficiaries named if something happens to one or all joint beneficiaries. You may name an irrevocable beneficiary for only a portion of the proceeds.

Combinations can become complicated. If a combination is of interest to you, we encourage you to seek the advice of a qualified attorney. It is worth keeping in mind that the more complicated the definition and the more beneficiaries involved, the greater the chance that someone will contest the designations.

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Choosing An Attorney

Understand The Consequences If You Want To Name A Minor As Beneficiary

You can leave the proceeds of a life insurance policy to a person who is not yet an adult.

However, if you just leave the proceeds directly to a minor, the insurance company will not usually pay proceeds directly to a minor. A minor cannot legally contract and release the insurance company of further liability. A court may have to get involved to appoint a guardian to take responsibility for the money until the minor becomes an adult. (To learn more, see Alternatives For Taking Care Of Your Children).

Many life insurance policies contain provisions which provide that if the beneficiary is a minor, the insurance company can hold the insurance proceeds in trust until the minor becomes of age, at which time the minor will receive the proceeds plus interest. These provisions may permit the insurance company to make small payments to the person caring for the minor for the minor's benefit, but this is seldom satisfactory since the periodic payments rarely can provide any substantial support for the minor.

If you want the money to go for the benefit of a minor, consider leaving the money to a trust that benefits the minor or to a guardian for the child. To avoid ongoing trust fees and administrative costs, consider working with an attorney to create a trust that will not become active until you die. For more about trusts, see Trusts.

If You Want To Name A Spouse Your Beneficiary, Be Clear Whether It Is The Relationship That Controls

Naming your spouse as beneficiary will prevent the proceeds of your life insurance from being added to your estate for estate tax purposes. All bequests to a spouse pass to the spouse free of estate tax.

Still, keep in mind, that the proceeds could then be taxable as part of your spouse's estate -- unless, of course, the spouse spends the money.

In order to avoid confusion, list the person by name rather than by your relationship. If the beneficiary is "My husband, Harry Simms" there will be a question whether Harry receives the proceeds if you are remarried at the time of your death. If you want Harry to be beneficiary whether the two of you are married or not, designate the beneficiary just by name.

NOTE: Should you divorce, be sure and change the beneficiary if that is your wish. Divorce papers by themselves will not change the identity of whoever is the named beneficiary.

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Taxes

You Can Name A Significant Other Or Life Partner As Beneficiary With Discretion If You'd Like

If you are in a non-legal heterosexual relationship or a same sex relationship, and wish to provide for your partner in the event of your death, you can name your partner as beneficiary of your life insurance.  While it is relatively easy for a Will to be contested, it is more difficult and expensive (though not impossible) for family members to contest the distribution of life insurance proceeds.

In order to avoid questions about your relationship (and potential problems with the life insurance company) list the beneficiary by name only. If the insurance company insists on asking the relationship, "friend" fits.

If you want to name a person as beneficiary of a group life insurance policy, but you don't want to disclose the information to your employer, leave the money "to my estate" or to a trust. If you leave the money to your estate, your Will determines who gets the money. Be sure your Will leaves the money to the intended person. (See immediately below for more information on leaving life insurance proceeds to your estate).

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Wills Trusts

You Can Name Your Estate As Beneficiary Of A Life Insurance Policy

If an estate is named beneficiary of a life insurance policy, the proceeds of the policy will be paid to the estate and then distributed along with the rest of the estate's assets.

If, in fact, you wish the proceeds from the policy to go to a specific individual or individuals, naming your estate as beneficiary is not the best method -- unless for some reason you don't want the people who deal with the insurance to know the identity of your beneficiary(ies).  For example, if you are gay or having an affair, you may not want your employer to know the identity of the person you care enough about to leave a life insurance benefit. 

If the proceeds from a life insurance policy pass through your estate rather than directly from the insurance company to the beneficiary:

  • The proceeds will likely be subject to a commission payable to your Personal Representative/ Executor since that person generally receives compensation based on the assets that pass through the estate. If the money goes directly from the insurance company to the named beneficiary, there is usually no fee to be paid to the Personal Representative/Executor.
  • If debts against your estate are larger than your other assets, creditors may take a portion, or possibly all, of the insurance proceeds.
  • It will take longer for the person to receive the money. Generally, money in an estate is held until all debts are determined, all assets collected and approval is received for distribution of the assets. On the other hand, insurance proceeds payable directly to beneficiaries are usually paid within 30 days of the insurance company's receipt of a death certificate.

NOTE: If you die and no beneficiary is named on the insurance policy, the proceeds will be paid to your estate.