What Is a Beneficiary and How Do I Choose One?

One of the reasons you might purchase a life insurance policy is to provide for your family if you pass away unexpectedly. Life insurance policies allow you to leave your family with financial support and security. When you buy a life insurance policy you will get to choose a beneficiary. 

What Is a Beneficiary?

A beneficiary is someone who receives the monies from your life insurance policy when you die. A beneficiary doesn’t have to be a person, however. You can name an organization or board of trustees as beneficiaries. A life insurance beneficiary inherits the death benefit. For example, if your life insurance policy includes a $100,000 death benefit, and you named your spouse as your beneficiary, your spouse would receive $100,000 as the insurance beneficiary

Some common beneficiaries include:

  • A spouse
  • A sibling
  • A child or all of your children
  • A Trust
  • Family friends
  • Business partners
  • A nonprofit organization
  • Your estate

Why You Need a Beneficiary

  • Peace of mind. You know exactly where your money is going and who it’s going to benefit. This will give you peace of mind about the future. 
  • Efficiency. Without an established beneficiary, your assets may have to go through probate. Probate is expensive and time-consuming. Choosing a beneficiary often allows your assets (especially in the case of a death benefit) to bypass probate. 
  • Clarity. Clarity is especially important when establishing a beneficiary for a will because families could potentially have conflicts over specific assets. When you choose a beneficiary, you’re able to make your wishes clear and ensure that your money goes to the people or organizations you want it to. 

Can You Have Multiple Beneficiaries? 

It’s very common to have multiple beneficiaries. Many people want to support their families, contribute to their desired charities or churches, and help their other loved ones. When this is the case, naming multiple beneficiaries can be the best way to provide for all of your loved ones. The key with multiple beneficiaries is to establish exactly how much each beneficiary receives and who the contingent beneficiaries are. 

Types of Beneficiaries 

There are two main types of beneficiaries for both wills and life insurance, and there are two ways that benefits can be disbursed to the beneficiaries.

Primary vs. Contingent Beneficiaries

A primary beneficiary is who you choose to receive your assets or death benefit. A contingent beneficiary is like a backup beneficiary.  If the primary beneficiary is deceased, the contingent beneficiary becomes the primary beneficiary.

There are two ways you can set up life insurance beneficiaries:

  • Per capita. This designation only applies if you have more than one beneficiary. If one of the named beneficiaries isn’t able to collect, their portion of the death benefit will be divided among the remainder of the named beneficiaries. 
  • Per stirpes. If you elect this designation for your beneficiaries, the money will pass to the children or other dependents of the deceased beneficiary. For example, if your brother was one of your beneficiaries, but he passed away shortly before you, your brother’s portion of the death benefit would pass to his children. 

Revocable vs. Irrevocable Beneficiaries

You can also designate your beneficiaries to be revocable or irrevocable. When you have revocable beneficiaries, you’re able to add and remove people or organizations from your list of beneficiaries without their permission. For example, you could remove a partner as a beneficiary if you no longer want to pass the money onto them. Or you could add a co-beneficiary without the permission of the other primary beneficiary. 

With an irrevocable beneficiary, it isn’t possible to remove them from the life insurance policy without their permission. You also aren’t able to name additional beneficiaries without permission from a current irrevocable beneficiary. 

How to Choose a Beneficiary

The most important consideration when choosing a beneficiary is determining who depends on you financially. Most often, the people who depend on you financially are your immediate family members like your spouse or children. In this situation, you may name your spouse as the primary beneficiary and together decide on contingent beneficiaries. 

But your immediate family might not be the only ones who depend on you financially. If you help support your parents, you’ll want to consider how you can continue to support them. If you help pay for a family member’s college tuition or make regular contributions to a church or charity, you’ll also want to consider how you can continue to support these people and organizations. Once you’ve determined who or what you want to support financially, you’ll know who your beneficiaries should be. 

After deciding on a beneficiary or beneficiaries, you’ll want to establish exactly how much each beneficiary will receive. The best way to divide everything is by using percentages instead of exact dollar amounts because assets can continue to grow in worth (or decrease). 

Can Beneficiaries Be Denied the Death Benefit? 

For a life insurance policy death benefit, there are some situations where the beneficiaries might be denied the money: 

  • The policyholder didn’t make all of the premium payments for the policy and the policy was no longer enforce.
  • The insured knowingly lied about information on the policy application and dies within the contestability period usually the first two years of a policy.
  • The insured dies of suicide during the contestability period.
  • The beneficiary is criminally involved in the death of the insured.

In summary, having your beneficiaries set up correctly is extremely important.  When someone gets a new policy they will usually set up the beneficiaries the way they want them.  But something many people fail to do is to make updates as life changes.  We believe it’s important to periodically review and adjust beneficiaries if necessary and we help our Clients make those adjustments as necessary along the way.  Schedule an appointment with us if you need to review or update your beneficiaries.