A life insurance beneficiary is a person or entity named in a life insurance policy to get its proceeds. There can be more than one beneficiary designated.
The “proceeds” of a life insurance policy is the amount due to the beneficiary(ies) when the insured dies. The amount depends on the kind of life insurance involved. No matter whether a term policy or a whole life policy, the proceeds are payable only if the policy is in force when the insured dies.
How Much Gets Paid For Life Insurance?
- The proceeds of a term insurance policy are the face value of the policy
- The proceeds of a whole (or permanent) life insurance policy are the face value of the policy less any unpaid policy loans or plus any increase from dividends that are used to buy additional insurance.
A dividend is part of an insurance company’s profits allocated to policyholders owning “participating policies.” Usually, dividends are paid only on “whole life” and not on “term life” insurance policies. When a whole life insurance policy is purchased, the owner of the policy (usually the person buying it) gets the choice of how dividends are paid.
The options typically are:
- In cash
- To reduce premiums
- Buy more insurance
- Leave it with the insurance company and earn interest on it
Kinds of Life Insurance Beneficiaries
There are 2 kinds of life insurance beneficiaries: primary and contingent.
- The primary beneficiary gets the proceeds when the insured dies if he or she is alive at the time of the insured’s death.
- The contingent beneficiary (sometimes called a “secondary beneficiary”) gets the proceeds only if the primary beneficiary dies before the insured does. If the primary beneficiary is still alive, the contingent beneficiary isn’t entitled to anything.
A subset of both kinds of beneficiaries is revocable and irrevocable beneficiaries. Understand that the owner of the life insurance policy has the power to designate the beneficiaries. He or she may be able to change the beneficiary at any time before the insured’s death. If that’s the case, the beneficiary is a revocable beneficiary. There is not much that a revocable beneficiary can do if the policy owner changes the beneficiary, But, there may be some recourse if there is reason to believe that the policy owner was wrongly induced to make the change. Another reason might be that the policy owner suffered from a mental or intellectual deficit and was taken advantage of to make the change. Both are hard to prove and usually require lawsuits.
If the policy owner names a person as an irrevocable beneficiary, the policy owner cannot change the beneficiary unless the beneficiary consents to the modification.
Revocable beneficiary designations are more common than irrevocable designations, mainly because of their flexibility. Complex legal issues can arise in trying to untangle irrevocable beneficiary designations. An illustration is if a spouse were named as an irrevocable beneficiary and the couple wished to divorce. Yet, it might make sense to name children as irrevocable beneficiaries to ensure that there are funds to care for them if a parent prematurely dies.
Strategies to Pick a Life Insurance Beneficiary
- Do you have family that depends on you for financial support? If so, they should probably top your list. These people might include a spouse, a domestic partner, children or other family members. It is entirely your choice as to who you pick, omit, or make primary or contingent beneficiaries. But remember, decisions have consequences…
- If at least part of your life insurance proceeds will go to minor children, and especially if they are very young, you may want to designate a legal guardian as the recipient. This could be your spouse or someone else. This can be somewhat of an involved process because a court may have to OK the appointment of the designated guardian before money is disbursed.
- Business Associates: In this situation, life insurance proceeds can be used to purchase the deceased’s interest in the business and pay survivors for the deceased’s share of the business.
- Charity: You are always free to name a charity as a beneficiary.
- A trust can be established and named as the beneficiary. Proceeds are paid to the trust and the trustee administers the proceeds according to the terms of the trust.
- Your own estate can be named as the beneficiary and proceeds distributed according to your Will. There may or may not be estate tax consequences.
It’s important to always consider life insurance for a variety of factors and circumstances. You should also determine the type of life insurance you’d like to purchase as early as possible to help with premiums long term. Consult with your insurance broker as life insurance is a common product and available in every state.