You have to make a few important decisions when purchasing life insurance, including the policy type, coverage amount, and term length. But there’s another critical factor to consider: your life insurance beneficiary.
A beneficiary is a person (or entity) who receives your death benefit if you pass while covered. Identifying your beneficiaries is a decision to consider carefully, depending on your policy, death benefit amount, and legacy goals.
Understanding who can be a beneficiary—and how to choose one—is an integral part of financial planning. It’s also something you should review regularly once you have a life insurance policy. Here’s what to know.
Understanding the Beneficiary’s Role
Life insurance is a contract between you and an insurer. You pay premiums for the policy, and if you pass away during the covered period, the insurer pays a death benefit to your beneficiary.
That money can be used to:
- Replace your income for loved ones who depend on you
- Pay your funeral expenses
- Pay down outstanding debts
- Cover future college expenses for your children
- Grant a monetary gift to an organization or charity important to you
The intent is to provide financial security and support during a difficult time. That said, beneficiaries typically have no legal obligations regarding how they must use the money. You can discuss your wishes for how they use the funds, but it’s generally at their discretion.
Occasionally, beneficiaries may need to cover administrative duties, such as using death benefit proceeds to settle debts or pay outstanding taxes owed to the IRS.
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Who to Name as a Beneficiary
So, who can be a beneficiary? In reality, the answer is any person or entity.
However, some states have laws noting that a beneficiary can’t be a minor under 18 without also naming a guardian to manage the funds in their name until they come of age. Similarly, if your beneficiary is disabled, you may want to set up a special needs trust to receive the benefit without impacting government benefits.
Generally, a beneficiary can be:
- Close dependents like your spouse or adult children
- Family members like your parents, siblings, cousins, nieces, and nephews
- Beloved friends and romantic partners
- Organizations and charities close to your heart
- Your business or business partners
To name a beneficiary, you’ll need their legal name and contact information, date of birth, and Social Security number to list on your life insurance policy. If you choose an entity or business, you must provide its name, mailing address, and tax ID number.
It’s helpful to let your beneficiaries know you’ve chosen them so they’re aware of their status after you pass. If a life insurance company can’t find a beneficiary, their share of the death benefit may go to your estate.
Similarly, if you don’t name a beneficiary, your death benefit could end up as part of your estate. Your loved ones may need to go through the probate process and other legal complexities to access the money. A court could decide who receives the funds, which may not align with your wishes.
Types of Beneficiaries
You can name two different types of life insurance beneficiaries.
Primary Beneficiary
A primary life insurance beneficiary is the person or entity first in line to receive your death benefit. Often, this may be a spouse.
Contingent Beneficiary
A contingent beneficiary is the person or entity next in line for your death benefit. If your primary beneficiary dies before you or can’t be located, the funds go to the contingent beneficiary.
Considerations When Choosing a Beneficiary
When choosing your beneficiaries, keep a few factors in mind, including their age and marital status as well as your financial plans. It can be helpful to discuss your beneficiary choices with a financial advisor or estate planning attorney. They can review your situation’s unique considerations and tax implications to help guide your decision-making.
Can You Have Multiple Beneficiaries?
You can name multiple primary beneficiaries. You may want multiple people or entities to receive support after you’re gone. In that case, you’ll need to name each beneficiary in your policy along with the percentage they’ll receive.
For example, if you have a spouse and two kids, you may want your spouse to receive 50 percent and your children to receive 25 percent each. If you don’t have any dependents, you may want to split the death benefit equally between your nieces and nephews, or you may designate a portion to a charity and the remainder to a close friend.
Can You Change Beneficiaries?
Reviewing your beneficiaries regularly is generally recommended, especially after significant life events. For example, if you get divorced, become widowed, or have a baby, ensure the person you’ve named as a beneficiary is still who you want to receive your death benefit.
Keep in mind that if you have a revocable life insurance policy, you can change the beneficiary without their knowledge or consent. However, with an irrevocable life insurance policy, you must get the beneficiary’s consent before making changes.
Finding the Right Coverage for You
Life insurance is a lasting gift you can leave to the most important people or organizations in your life. So, it’s not a decision to take lightly.
Colonial Penn has specialized in making life insurance simple and accessible by offering it directly to consumers since 1957. Review the types of coverage available and consider your financial situation to ensure you choose the best life insurance policy for your needs.
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Colonial Penn has specialized in making life insurance simple and accessible by offering it directly to consumers since 1957. Click here to learn more.
