Naming a beneficiary is one of the most important decisions a life insurance policy owner makes. The beneficiary designation determines who is entitled to receive the policy’s death benefit when the insured dies.
But beneficiary planning involves more than entering a name on an insurance company form. Family changes, trusts, business arrangements, estate planning, and the way multiple beneficiaries are designated can all affect whether the proceeds ultimately pass as intended.
For that reason, beneficiary designations should be coordinated with the purpose of the policy and reviewed periodically as circumstances change.
What Is a Life Insurance Beneficiary?
A life insurance beneficiary is the person, trust, organization, business, or other entity designated to receive policy proceeds following the insured’s death.
The policy owner generally controls the beneficiary designation. The insured and policy owner are often the same person, but they do not have to be.
A policy can also have more than one beneficiary, and different beneficiaries can receive different percentages of the death benefit.
The Beneficiary Designation Is Part of the Policy
A will or other estate-planning document does not ordinarily replace the beneficiary designation on a life insurance contract. The policy designation should therefore be coordinated with the owner’s broader estate and financial plan.
What Is the Difference Between a Primary and Contingent Beneficiary?
A primary beneficiary is first in line to receive the life insurance proceeds when the insured dies.
A contingent beneficiary generally receives the proceeds if no primary beneficiary is eligible to receive them at the insured’s death.
For example, a policy owner might name a spouse as the primary beneficiary and children or a trust as contingent beneficiaries.
Naming contingent beneficiaries is important because it provides instructions for what should happen if a primary beneficiary dies before the insured or otherwise cannot receive the proceeds.
Without an eligible beneficiary, the policy’s contractual provisions and applicable law determine where the death benefit is paid. Depending on the circumstances, that could result in proceeds becoming payable to the policy owner or the insured’s estate.
What Information Is Needed to Name a Life Insurance Beneficiary?
Insurance companies typically request enough information to clearly identify each beneficiary. Depending on the beneficiary and carrier, that may include:
- Full legal name
- Date of birth
- Relationship to the insured
- Address or other contact information
- Social Security number or taxpayer identification number
- The percentage of the death benefit assigned to the beneficiary
Trusts, charities, businesses, and other entities may require different identifying information.
The objective is to make the designation sufficiently clear that the insurance company can identify the intended beneficiary and distribute the proceeds according to the policy owner’s instructions.
Can You Change a Life Insurance Beneficiary?
In many policies, the owner can change a beneficiary during the insured’s lifetime by completing the insurance company’s required beneficiary-change process.
An important exception is an irrevocable beneficiary. When a beneficiary has been designated irrevocably, the policy owner’s ability to change the beneficiary or exercise certain other policy rights may require that beneficiary’s consent.
The specific rights depend on the policy and applicable law, so an irrevocable designation should not be made casually.
How Should Multiple Beneficiaries Be Designated?
When a policy has multiple beneficiaries, the designation should clearly state how the death benefit is to be divided.
For example, a policy owner with three children might designate each child to receive one-third of the proceeds. Another owner might allocate different percentages based on the objectives of the plan.
The percentages assigned at each beneficiary level should generally total 100%.
Just as important is deciding what should happen to a beneficiary’s share if that person dies before the insured. The answer should not be assumed simply because several beneficiaries are named.
What Do Per Stirpes and Per Capita Mean?
Per stirpes and per capita are methods of determining how a deceased beneficiary’s share may be distributed among surviving family members.
| Designation | General Concept |
|---|---|
| Per Stirpes | A deceased beneficiary’s share generally passes down that beneficiary’s family branch to qualifying descendants. |
| Per Capita | Proceeds are generally divided among the surviving beneficiaries within the class specified by the designation. |
The exact result can depend on the wording of the beneficiary form, the policy, and applicable law. Even the term “per capita” can be applied differently depending on the designation being used.
For larger policies or more complicated family structures, beneficiary language should be coordinated with the family’s estate-planning attorney rather than relying on assumptions about what these terms mean.
Should a Minor Be Named as a Life Insurance Beneficiary?
A minor can be named as a beneficiary, but doing so directly can create practical problems.
Insurance companies generally cannot simply deliver a substantial death benefit directly to a minor. If no appropriate arrangement is already in place, a court-supervised guardianship, conservatorship, or similar process may be required before the proceeds can be managed for the child.
One alternative is to have the proceeds payable to an appropriately structured trust for the child’s benefit. The trustee can then manage and distribute the assets according to the trust terms rather than requiring the child to receive the proceeds outright.
Consider Who Will Manage the Money, Not Just Who Will Receive It
When the intended beneficiary is a child, beneficiary planning should address both who ultimately benefits from the life insurance and who will be responsible for managing the proceeds until the child is able to do so.
What If a Life Insurance Beneficiary Has Special Needs?
Beneficiary planning requires additional care when the intended beneficiary receives, or may later qualify for, means-tested government benefits.
An outright inheritance or life insurance death benefit can increase the beneficiary’s countable resources and may affect eligibility for programs such as Supplemental Security Income (SSI). Medicaid eligibility can also involve program- and state-specific rules.
A properly structured special needs trust may allow assets to be managed for the beneficiary while preserving access to certain means-tested benefits, depending on the type of trust and the applicable rules.
This is an area where the beneficiary designation should be coordinated with an attorney experienced in special needs planning. Simply naming the individual directly—or naming a trust without understanding how it is structured—can produce unintended results.
Should You Name Your Estate as the Beneficiary?
There are circumstances in which naming an estate may be intentional, but it can have consequences that should be understood before making the designation.
Life insurance payable to an estate can become part of the estate-administration process. That may expose the proceeds to probate procedures, estate expenses, creditor claims, and the distribution provisions of the insured’s estate plan.
There is also an important distinction between income tax and estate tax. Life insurance death benefits paid to a beneficiary are generally excluded from the beneficiary’s gross income for federal income-tax purposes. Estate-tax inclusion is a separate question.
Life insurance proceeds payable to or for the benefit of the insured’s estate are generally included in the insured’s gross estate for federal estate-tax purposes. Proceeds payable to another beneficiary may also be included when the insured retained certain incidents of ownership in the policy.
For significant policies and taxable estates, the ownership structure and beneficiary designation should therefore be evaluated together.
Can a Trust Be the Beneficiary of a Life Insurance Policy?
Yes. A trust can be named as the beneficiary of a life insurance policy, and doing so can provide greater control over how and when proceeds are used.
Rather than distributing the death benefit directly to individual beneficiaries, the insurance company pays the proceeds to the trustee. The trustee then administers the assets according to the terms of the trust.
This can be useful when beneficiaries are minors, when distributions should occur over time, when asset-management provisions are important, or when life insurance is integrated into a broader estate plan.
However, naming a trust as beneficiary does not by itself determine whether the death benefit will be included in the insured’s taxable estate. Trust design, policy ownership, retained rights, and other factors can all matter.
Revocable Trust vs. Irrevocable Life Insurance Trust
A revocable trust and an irrevocable life insurance trust can serve very different purposes.
| Trust | Potential Role |
|---|---|
| Revocable Trust | Can provide instructions for managing and distributing life insurance proceeds and coordinate those proceeds with the broader estate plan. |
| Irrevocable Life Insurance Trust (ILIT) | May be used to own and receive life insurance as part of estate-liquidity and wealth-transfer planning when properly structured and administered. |
A revocable trust can provide valuable administrative and distribution control, but naming a revocable trust does not by itself remove life insurance from the insured’s taxable estate.
An irrevocable life insurance trust (ILIT) involves additional ownership, funding, administration, and estate-tax considerations. Whether an ILIT is appropriate depends on the family’s objectives and overall estate plan.
Can the Policy Owner, Insured, and Beneficiary Be Different People?
Yes. The policy owner, insured, and beneficiary can be three different people or entities.
But that structure deserves careful review.
For example, when one person owns a policy on another person’s life and the death benefit is payable to a third person, gift-tax issues can arise at the insured’s death. This is sometimes referred to in life insurance planning as the “Goodman triangle.”
Ownership also determines who controls important policy rights, including the ability to change beneficiaries, access policy values, assign the contract, and make other policy decisions.
For that reason, beneficiary planning should not be separated from the ownership structure of the policy.
When Should Life Insurance Beneficiary Designations Be Reviewed?
Beneficiary designations should be reviewed periodically and whenever a significant change occurs in the family, business, policy, or estate plan.
Events that may warrant a review include:
- Marriage or divorce
- Birth or adoption of a child
- Death of a beneficiary
- Children reaching adulthood
- Changes involving a beneficiary with special needs
- Creation, amendment, or termination of a trust
- Changes in business ownership or a buy-sell arrangement
- Significant changes in the size or structure of the estate
- Changes in the purpose or ownership of the life insurance policy
A beneficiary review can also be incorporated into a broader life insurance policy review so the designation, ownership, policy performance, and planning objective are evaluated together.
Life Insurance Beneficiary Designation Checklist
Four questions can help determine whether an existing beneficiary designation still reflects the policy owner’s intentions.
People
Have births, deaths, marriages, divorces, or other family changes affected who should receive the policy proceeds?
Percentages
Do the primary and contingent beneficiary shares still reflect the intended distribution, and are the instructions clear if a beneficiary dies first?
Planning Documents
Does the designation coordinate with current trusts, estate-planning documents, and any applicable business agreements?
Policy Structure
Are the relationships among the policy owner, insured, and beneficiaries still appropriate for the planning objective?
The Bottom Line
A life insurance beneficiary designation may look like a simple administrative decision, but it can determine how a significant asset passes at death.
The right designation depends on the people involved, the purpose of the coverage, policy ownership, trusts and estate-planning documents, and what should happen if circumstances change before the insured dies.
For that reason, beneficiary designations should be documented clearly and reviewed as part of the ongoing management of the life insurance policy.
