Your beneficiary is the person who will receive the cash from your life insurance policy, called a death benefit, when you pass away. The beneficiary is the one who decides how to use the money, so it is important to select a beneficiary who you trust.
Know Why You Have a Life Insurance Policy
Most people purchase a life insurance policy because they don’t want their family to be financially burdened when they die. Depending on your age and specific life circumstances, different members of your family could be affected differently upon your death. This is why it is important to first know why you have life insurance before you name your beneficiary. Below are the top reasons why people purchase life insurance:
- Funeral expenses
- Leave an inheritance
- Allows family to continue the same standard of living
- Cover debts
- Pay a mortgage
Your reason(s) for purchasing life insurance will help you decide who your beneficiary or beneficiaries should be.
Who Can Be a Beneficiary?
There are very few rules regarding who can be named a beneficiary for your life insurance policy. Who you name is completely up to you. The most common beneficiaries include, but are not limited to:
- Spouse/Partner
- Child(ren)
- A trust
- A charity
- Your estate
- Another relative
You can have one beneficiary or you can name multiple. It’s important to note that if you name a single beneficiary, it’s a good idea to also name a contingent beneficiary. This is someone who will receive the money if your primary beneficiary dies before you do, if they can’t be located, or if they simply don’t wish to receive the death benefit.
If you name multiple beneficiaries, you need to think about how you want the money split up. There are a few ways this can be done:
- Per capita: If you choose per capita, the money will be split evenly among your beneficiaries.
- Per stripes: This means if one of your main beneficiaries dies before you, their money will go to their heirs, which is usually their children.
- Percentage: You can also decide to allocate the money to your beneficiaries based on a percentage.
Can I Name a Minor as My Beneficiary?
Because there are so few rules about whom you can name as a beneficiary, you can also choose a minor. However, a minor cannot legally receive the money until they are 18 years old. Naming a minor as the beneficiary can create a legal obstacle if you haven’t also appointed a legal guardian to handle the money for them. If you want the money to go to a minor, there are three options on who to name as beneficiary:
- A responsible adult guardian: You can choose to name someone you trust who will make sure the money is used to pay for the minor’s expenses, such as private school, a vehicle, or other expenses. The guardian may also choose to give the minor the money when they reach adulthood.
- A trust established for the minor: A trust allows a third party to handle assets for a minor until the minor reaches a certain age, usually 21. At that point, the money will be transferred to the minor beneficiary.
- A Uniform Transfers to Minors Act account: This type of account allows a minor to receive the payout in a special account they can access when they become an adult.
How To Name Your Beneficiary
Now you’re ready to name your beneficiary! Here’s a quick how-to:
- Decide Who: Who will be most affected by your death, or who will need the money the most?
- Choose a Primary and Contingent: If you only have one beneficiary, make sure to also choose a contingent. If you have more than one beneficiary, a contingent may not be necessary.
- Know if Your Beneficiary is Revocable or Irrevocable: An irrevocable beneficiary is someone who, once you name them, will always have rights to your death benefit. You will most likely not be able to remove them as a beneficiary. On the other hand, a revocable beneficiary is one you can change if you need. Before you choose beneficiaries for your life insurance policy, ask if they are revocable or irrevocable.
- Gather Information: When you name your beneficiary, gather as much information about them as possible, including their full name, address, phone number, Social Security number, and date of birth. The more information you can provide, the easier it will be to contact them upon your death.
- Add Your Beneficiaries: Make sure your insurance company knows all beneficiaries for your insurance policy, as well as a breakdown on how you want the money allocated.”
- Update Your Beneficiaries as Needed: If your beneficiaries’ information changes, particularly their contact information, update it as necessary. If you have revocable beneficiaries and you experience a change in life circumstances, such as a divorce, update your policy as soon as possible.
That’s all you need to do. Choosing a beneficiary or beneficiaries for your life insurance policy is all about making sure your death benefit is used wisely. Who you choose is totally up to you. For more questions about beneficiaries, refer to our FAQ center.
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