What is a life insurance beneficiary?
A life insurance beneficiary is the person, trust, charity, or entity that is legally designated by the policy owner to receive the policy’s death benefit upon the insured person’s passing.
After the insured dies, the beneficiary can file the claim and receive the benefit. The beneficiary can also choose a lump sum or installments if the owner has not locked that in. They can disclaim the benefit, update their own contact details, and update payment information with the insurer. The beneficiary cannot rename the payout or change the amount.
Revocable beneficiaries essentially have no control over the policy, and the policy owner does not need to notify them or get their approval to change beneficiaries, raise or lower the coverage amount, add or drop riders, cancel the policy, take a loan, or withdraw cash value on a permanent policy. With an irrevocable beneficiary, consent is required for changes that reduce or redirect that beneficiary’s interest: removal, a lower share, a lower face amount, a loan, cancellation, or a collateral assignment. Irrevocable beneficiaries are uncommon and usually come from a divorce decree, a loan, or a deliberate choice to lock in a child from a prior marriage.
Some common beneficiaries are spouses, children, parents, siblings, trusts, charities, businesses, domestic partners, and close friends. Primary beneficiaries are the first in line to receive the death benefit. Contingent beneficiaries are backup recipients in case the primary predeceases the insured, cannot be located, or disclaims.
When a policy owner does not name a beneficiary, or all named beneficiaries are deceased with no contingent, the death benefit is paid to the insured’s estate. The benefit goes through probate and is paid under the will, or under state intestacy if there is no will.
A common mistake that policy owners make is not updating after major life events such as divorce, marriage, birth, or death. Failure to update the designation after major life events can result in a spouse or child receiving nothing because the old form still controls the policy. Another common mistake is naming a minor as a beneficiary. A minor cannot directly receive or manage the funds. Without a trust or UTMA, the funds would be under the control of a court-appointed custodian until the child reaches the age of majority.
On an existing policy, the owner should review designations once a year and after any major life event. Check each person’s full legal name and relationship, confirm the percentages total 100 percent, and remove outdated entries such as “my wife” or “my kids.”