Understanding Life Insurance Beneficiaries

Naming a life insurance beneficiary should be an easy process. A good life insurance can guide you through all the legalities involved in the naming the beneficiaries correctly. However, if you try doing it on your own, you may face a number of potential legal, financial and tax-related issues. Therefore, it is advisable to do a proper research to avoid making mistakes that can hurt you financially.

In this article, we tried our best to explain to you the different types of life insurance beneficiaries and the process itself. If you have questions that are not answered in this article, you can leave your query in the comment section below and we will be happy to help you out.

Life Insurance is For Everyone:


If you care enough to buy a life insurance policy to benefit the people in your life whom you want to protect financially, then you should seriously concentrate on how to execute this important contract properly. We know there are many complex procedures in the life insurance industry that can mystify people. One of those complex areas that require further explanation is the designation of primary, contingent, and tertiary beneficiary in your policy. It’s not just our job to see that you get the best coverage and rates, but it’s also our responsibility to guide you on the right way to do things.

Choosing a Life Insurance Beneficiarylife insurance beneficiaries

First of all, what does choosing a life insurance beneficiary mean? And why is it important for you to understand whom to designate, how to select, and whether you should have more than one life insurance beneficiary?

First, let’s flush out what a beneficiary is. Simply put, it is the person who receives the proceeds or death benefit of a policy when the insured person dies. That policy owner has complete freedom of choice when it comes to naming a beneficiary… there are no rules or restrictions as to whom they select. But one beneficiary designation may not be enough and here is why. Again, let’s not forget your intent here. You want to leave a financial legacy to make life easier for the heirs you leave behind.

Three Types of Life Insurance Beneficiaries

You might call it a line of succession or the 1, 2, 3 of beneficiary designations. Let’s begin with your “number one;” the first in line to receive your insurance payout upon your death.

What Is a Primary Beneficiary on a Life Insurance Policy?

A primary beneficiary or “First in Line” is commonly your spouse, adult children, or even a business partner.  There is no restriction to choose only one person. You can split the proceeds among several primary beneficiaries to receive the money in percentages… say 50/50, or however, you want to divvy up the pie. A trust can also be designated as the policy beneficiary, but you will want to discuss that with your attorney or advisor as to the tax implications of choosing a trust vs. a person.

Key Fact: Life insurance proceeds paid to a person are generally not subject to creditors.

What Is a Contingent Beneficiary on a Life Insurance Policy?

Contingent or secondary beneficiary is the second in line to be paid if your primary beneficiary dies before you do. That is why naming a secondary beneficiary is important because if the primary beneficiary dies before the insured, then the benefits of the policy would be payable to the contingent beneficiary. Again, you can choose more than one secondary beneficiary to divide the money as you wish.

What Is a Tertiary Beneficiary on a Life Insurance Policy?

The final designation is the third in line or tertiary beneficiary, who would move to the front of the line if both the primary and contingent beneficiaries pre-decease the insured person. Number three rises up the chain and could become number one– or the primary beneficiary by attrition. Naming a tertiary beneficiary is not a common part of many life insurance applications, but your insurance carrier can provide you with a form to include that designation.

At the end of the day, the goal of designating a line of succession of life insurance beneficiaries is to allow for the smooth future distribution of wealth and to avoid high estate taxes. That’s the purpose of secondary and tertiary beneficiaries. The reasons you name these people vary. You might not think that your contingent choice is ready for “prime time” at the time you purchase the policy… not prepared to receive a big chunk of change. That’s why you would pick them as a future beneficiary to someday be mature enough to benefit if your primary choice were to pre-decease you.

Life Insurance Beneficiary By Name or Title

• Besides the order of beneficiary designation, the customary practice is to identify them by their Name and Relationship to you, e.g., Mary Smith, spouse. That is the cleanest, clearest indicator of your intent.

• Another way is to designate them is by “Beneficiary Class” or title, i.e., “Children of the Insured.”

Naming names make your intentions crystal clear, whereas designating a class can be murkier. If you have a blended family, you would need to clearly state whether all of your children— biological, stepchildren, or adopted by marriage— would be lumped into the category of “children of the insured.” This sounds logical, but it can get complicated and ugly if the former spouse’s kids feel excluded.

Another rule of thumb to follow is not to name minor children as beneficiaries, but rather a spouse or adult who would distribute those monies to the kids. Most insurers restrict benefit payments to underage people except through a legal guardian. Know the rules to avoid discomfort for your heirs later.

Dividing And Distributing Death Benefits

Designating how to distribute death benefit payouts falls under standard estate law practices. The titles are stated in the Latin terms– Per Stirpes and Per Capita. Quite simply, those terms spell out the distribution methods of property (or in this case an insurance payout) to family members and heirs.

Per Stirpes distributes the benefit to “branches of the family.” For instance, the spouse would receive half of the proceeds (as spelled out by you in the policy) and your surviving children– another “branch”— would divvy up the rest.

Per Capita distributes “by heads of the family.” Under this methodology, the children and spouse would receive an equitable percentage/division of the payout.

Revocable vs. Irrevocable Life Insurance Beneficiaries

Another distinction of life insurance beneficiaries worth mentioning is whether to name them as revocable or irrevocable.

1.Revocable beneficiaries: The owner of the policy has the right to change the beneficiary designation at any time.

2. Irrevocable beneficiaries: The owner of the policy requires the consent of the original beneficiary to remove their name from the policy. In other words, an irrevocable beneficiary designation is forever, and cannot be changed or removed from your policy without the consent of that beneficiary. You better be darn sure your relationship and financial obligation to that person is lasting.

Why would someone name an irrevocable beneficiary? To honor a divorce court order, naming the ex-spouse to the policy for life to comply with alimony or child support. Another reason could be for a prenuptial or post-nuptial agreement to spell out exactly what the spouse is entitled to in case of divorce. Some do it to protect biological children from a first marriage to ensure that those offspring will receive your life insurance payout without interference from a new spouse or stepparent.

It’s probably a good idea to discuss any of these wishes with a financial advisor or attorney to help guide you properly in this area.

Life Insurance Beneficiaries Outweigh Wills

First, let us make a case for the importance of having a properly executed last will and testament. Recent celebrities that died intestate are proof of that. Aretha Franklin died without a will, and her four sons are fighting in court to carve up her considerable fortune. The heirs of comedian Robin Williams and megastar singer/composer Prince are also battling it out in nasty court proceedings.

So, yes, write a will and lay out your wishes for the distribution of your property, so that all your assets go to the people you choose. But here is something worth noting; a life insurance policy trumps your will.

Most people don’t realize the power of that insurance contract. If a beneficiary is assigned to a bank account, that beneficiary has the rights to that money after the owner’s death even if the will states the assets in the account should go to another recipient. Your policy holds up no matter what your will says. Succession works for more than your insurance policy, you can also assign contingent beneficiaries to your retirement plan, as second in line to your primary.

>>To find out more about how to file a life insurance claim read our post.

Life Insurance Is For the Living

Many think it’s morbid to think about these things and plan for your death, but it is a reality of life that will serve you well if you keep emotion out of it and act pragmatically. The designation of life insurance beneficiaries is a critical factor in the life insurance process. We want to take the confusion and misunderstanding out of the process so that you can have a clear focus and stick to your goals.

One of the strongest take-home messages we can leave you with when it comes to life insurance beneficiaries or anything having to do with life insurance is to remember that a policy is a contract between you and the insurance company. In the case of a term life policy, it is enforced for the length of the term you purchased, generally 10-30 years. Permanent life insurance is for the lifetime of the policyholder. In either case, coverage remains in place as long as you pay the premiums. The policy lapses if you stop the payment.

But things change, and you shouldn’t just buy a policy to set it and forget it. You should do a policy review every couple of years or if family circumstances change, such as a divorce, the birth of a new baby, or purchase of a home with a mortgage. Remember that the beneficiary is the person or people you want to benefit financially from the loss of your support or income.

Having a Contingent Beneficiary Can Save Taxescontingent beneficiary and taxes

It bears repeating that naming life insurance beneficiaries in your policy could avoid significant taxes, which would be incurred by having your death benefits go into your estate and be taxable upon your death. If your spouse is the primary and only beneficiary and dies before you do without you having a named contingent beneficiary, those proceeds would pass into your estate upon your death. Even if the insured person dies simultaneously with the spouse (accidents do happen), that money will get hit with big taxes.

>>Read more on life insurance and taxes

The best way to mitigate these unfortunate consequences is to manage the money with forethought. Naming other adult family members, as secondary or contingent beneficiaries will avoid a taxable event down the road; otherwise, those very same heirs will lose a chunk of it to the government in the future.

To conclude, selecting your primary and contingent beneficiary is just as important as owning your life insurance policy. Understanding the process of life insurance and the distribution of funds will help you in making the right decision for your family. Also, let your life insurance beneficiaries know about your policy. You don’t want your policy to go unclaimed when you really bought it thinking about your loved ones.

If you don’t have a life insurance policy in place, you can always run free term life insurance quotes to see your rates. It only takes a minute, and you will have no obligation to buy the policy unless you are ready to put that financial protection in place.

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