How to Choose a Life Insurance Beneficiary & How Claims Work

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When you purchase a life insurance policy, you’ll be given the option of designating one or multiple beneficiaries to receive a death benefit in the case you pass away. There are almost no rules restricting who you can pick. In addition, you can easily change your beneficiary if, for example, you get divorced. The only real restriction is for minors, as you would need to designate a trust or legal guardian as the beneficiary to provide them the death benefit.

While you can name anyone as a beneficiary, just make sure to notify them and provide them with a copy of your life insurance policy. Otherwise, they may not know to or be able to file a claim when the time comes.

Choosing a life insurance beneficiary

Aside from minors, insurers don’t have rules on who you name as a beneficiary. In addition, life insurance beneficiaries are completely separate from those in your will, so the two lists don’t need to overlap, though they certainly can.

A beneficiary can be a person, charity, business or trust. If the beneficiary is a person, they can be a relative, child, spouse, friend or anyone else you happen to know. As some agents like to say, you can even name your "secret lover" as a life insurance beneficiary.

The only restriction arises if you’re married and live in a common property state, also called community property states. There are nine common property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, there are usually life insurance beneficiary rules that require your spouse to waive their rights if you want to designate someone else as a beneficiary.

While it’s not a legal or insurer restriction, we recommend that the policy owner, person insured and beneficiary are not all separate entities. This is because the IRS might view any proceeds from the death of the person insured as a gift from the policy owner to the beneficiary, meaning they can be taxed.

Similarly, we don’t recommend that you make a creditor a life insurance beneficiary, as is common with credit life insurance policies. Instead, designate the beneficiary as the person who would pay a debt. For example, by making your spouse the beneficiary, they can decide whether to use the death benefit to pay the mortgage (and continue living in the house) or for a more pressing expense.

What happens if you don’t have a life insurance beneficiary?

If you don’t name a life insurance beneficiary, or all your beneficiaries pass away before you do, your estate becomes the beneficiary. This means the life insurance proceeds go into estate probate, a long legal process during which your debts are settled and your estate is divided.

Since estate probate can take months and creditors can come after the life insurance death benefit, we recommend naming beneficiaries and keeping the list regularly updated. Otherwise, your family may not receive money when they need it (to cover your funeral, for example) or their payout might be reduced. This is also why, while you can name your estate as a beneficiary, we don’t recommend this option.

How to designate a life insurance beneficiary

Once you’ve determined who you would want as your beneficiaries, you should specify them on the life insurance beneficiary designation form. A beneficiary designation form is a legal document and will be used by the insurer to determine who will receive the death benefit if you pass away during the period of coverage (as well as how much they will receive). This designation overrides any other estate planning you may have, such as a will, so you need to be certain the listed beneficiaries are those you actually want to receive a benefit.

There are typically two levels of beneficiary: primary and contingent. A primary beneficiary is essentially your first choice to receive the death benefit if you pass away. A contingent beneficiary is the backup; they’re the person you would want to receive the payout in the case the primary beneficiary is deceased as well. So, if your spouse is your primary beneficiary and you both pass away in a car crash, the contingent beneficiary would receive the death benefit.

It’s important to be specific when designating a beneficiary, otherwise, you can end up with disputes between your loved ones. For example, just saying "husband" or "wife" on a life insurance policy would cause problems if you get divorced and remarried. The details needed will change according to the entity listed as a beneficiary but, for a person, you’ll want the following details:

  • Full name
  • Address (street address, city, state, zip code, country)
  • Phone number(s)
  • Social Security Number
  • Date of birth

If you want to have multiple life insurance beneficiaries, there are three ways to assign the death benefit each will receive:

Specific PercentageEach beneficiary is named and assigned a percentage of the death benefit.Your two children, Bart and Lisa, are your beneficiaries. Bart would receive 50% of the payout, Lisa 50%. If Bart passes away before you, Lisa would receive 100% of the payout.
Per StirpesThe death benefit is divided equally across each segment (or branch) of the family.Bart has 4 children and dies before you. Lisa would receive 50% of the payout and each of Bart’s children would receive 12.5%.
Per CapitaThe death benefit is divided equally across each person that is eligible to receive a payout.Bart has 4 children and dies before you. Lisa would receive 20% of the payout and each of Bart’s children would receive 20%.

While you can also assign a dollar amount for each beneficiary, but we don’t recommend this option. Many policies change in value over time and you don’t want to have a portion of money unassigned.

You can also specify whether a beneficiary should receive the life insurance proceeds as a lump sum payment or in monthly payments. This method is typically preferred if your beneficiary is a teenager or you wouldn’t necessarily trust them to spend a large influx of cash well.

How to designate a child or dependent as a life insurance beneficiary

If your intended beneficiary is a minor, some insurers won’t let you directly name them as a life insurance beneficiary. In these cases, you can either:

  • Name their legal guardian as the beneficiary.
  • Designate a custodian for the proceeds through the Uniform Transfers to Minors Act. This person is then named as the beneficiary.
  • Create a trust for the child and make the trust beneficiary. This has an added benefit as you can specify when trust proceeds are to be released and what they can be used for (for example, education expenses).

If your intended beneficiary is a long-term dependent, such as a family member with special needs, you will likely want to set up a trust for them as well, even if they’re not a minor. They could be disqualified from Medicaid and Supplemental Security Income by receiving over $2,000 as an inheritance. By setting up a trust as your beneficiary, you can avoid this issue and the trustee will manage the payout on your family member’s behalf.

How to change a life insurance beneficiary

Changing your beneficiary is a simple process. You just request a beneficiary change form from your life insurance company, enter the necessary information and return it to them.

The only time this process becomes complex is if you have irrevocable beneficiaries. You cannot remove or change the designated payout for irrevocable beneficiaries without their express consent. This is in contrast to revocable beneficiaries, who you can remove or edit the payout of whenever you choose. Having irrevocable beneficiaries can be difficult if, for example, you get divorced and need your ex-wife’s consent to change how your life insurance benefits are paid out. When you complete a designated beneficiary form, it will specify whether the beneficiaries are irrevocable or revocable, so make sure to check.

The majority of cases where a life insurance beneficiary is contested have to do with divorce (former spouse wasn’t removed from the policy) or changes made soon before death (predatory person convinced senior to make them sole beneficiary). This is why we recommend keeping your list of beneficiaries updated regularly and actively informing your family about any changes. The reason to have life insurance is to provide financial coverage to those you care about and keep the proceeds from being locked up in court for years.

The only situation in which you wouldn’t be able to change a beneficiary would be if you’re declared legally incompetent.

How beneficiaries can claim a life insurance policy

In order for your beneficiary to make a death claim against your life insurance policy, they will need:

  • Your death certificate
  • The life insurance policy (or a copy)
  • A claim form (from the insurer)
  • The primary beneficiary’s death certificate (if contingent beneficiary)

If you have multiple beneficiaries, each will need to submit a separate claim to the insurer in order to receive their portion of the proceeds.

Make sure that each of your beneficiaries has a copy of your life insurance policy and the insurer’s contact information. You may also want to provide them with access to your life insurance account, if the insurer has an online portal, as well as the records of your premium payments. This reduces the likelihood of a dispute between your beneficiary and the insurer about whether coverage was in place at the time of your passing.

Once a life insurance claim has been submitted, the insurer will review it and pay the death benefit, so long as there are no issues with the submission. The process to pay out life insurance beneficiaries can take anywhere from a few days to several weeks.

While there are some methods to search for unclaimed life insurance policies, these are typically restricted by insurer or state. So take the time to notify your beneficiaries appropriately, or you could pay thousands of dollars in premiums for no benefit to your loved ones.

Editorial Note: The content of this article is based on the author's opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.