Life Insurance Beneficiary Rules

You buy life insurance to ensure that the people you leave behind have access to money after you die. Sometimes, choosing the person who will receive the death benefit or beneficiary is obvious. For example, if you want to leave money for your spouse to replace your income and settle your final expenses, you'd likely make them the beneficiary. In some cases, selecting beneficiaries is a more complicated task. Understanding the basic life insurance beneficiary rules can help you make the right decision.

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Basic Life Insurance Beneficiary Rules

Each insurance company establishes its own set of rules for its life insurance policies, and terms may vary among the policies offered by one insurer. Still, some basic life insurance beneficiary rules exist that apply to most policies.

Who You Can Make a Beneficiary

Life insurance companies don't place many restrictions on who you can make the beneficiary of your policy. You can choose:

Your spouse
Your children
A trust
Your estate
A nonprofit organization
A legal entity like a business that you own

Establishing Primary and Contingent Beneficiaries

Most insurance policies include two types of beneficiaries:

Primary beneficiaries: People or organizations you want to receive the death benefit first
Contingent or secondary beneficiaries: People or organizations that will receive the payout only if the primary beneficiaries you have listed die before or at the same time as you

Some policies also have a final beneficiary, a party that receives the death benefit if all your primary and contingent beneficiaries have passed away. Often, people name a nonprofit organization or legal entity that will likely continue to exist for the foreseeable future as a final beneficiary.

Number of Beneficiaries

Some life insurance companies limit the number of primary and contingent beneficiaries that you can have on a policy. Others don't restrict the number.

Irrevocable vs. Revocable

Most life insurance policies allow you to make a beneficiary irrevocable or revocable.

An irrevocable life insurance beneficiary can never be changed.
A revocable life insurance beneficiary is one you can remove at any time.

Because revocable beneficiaries provide more flexibility, most people choose them. You may want to change, add or remove beneficiaries when:

You get married or divorced
Have your first child or a subsequent child
Your children become financially independent
Your beneficiary dies

Identification

If a life insurance company is unable to identify the named beneficiary, delays in claims may occur or the payout may go unclaimed. To help facilitate the payout, clearly identify every beneficiary by providing their:

Full name
Social Security number (or tax ID number in the case of a business, trust or nonprofit)
Relationship to you
Date of birth
Current address

Don't ever identify a person by relationship only, such as writing "child" or "spouse." If your family situation changes in the future, the insurance company may have difficulty determining who you mean.

Things to Consider When Choosing a Beneficiary

Some factors to consider when selecting life insurance beneficiaries include:

Who directly relies on you for financial support
Who may need help paying bills or covering other expenses when you die
Who will be responsible for your funeral expenses and debts
Who you would like to provide support or wealth for in the event of your death
Who is already named the beneficiary of any investments that you have
Who will inherit your estate according to the terms of your will

How Are Life Insurance Beneficiaries Divided?

When you select beneficiaries, you can determine how the payout will be divided. For example, you can give a single beneficiary 100% or two beneficiaries 50% each. The shares don't have to be equal, but they must add up to 100%.

If you don't specify how to divide the death benefit, the life insurance company will usually distribute equal shares to beneficiaries.

Can a Minor Be a Beneficiary?

Yes, you can name a minor a beneficiary on a life insurance policy. However, a child may not be able to access the payout from the policy until they reach the age of majority according to the state they live in, which is most often 18. As a result, the beneficiary won't be able to use the money that you designated for them to cover immediate expenses. You can avoid this problem by:

Selecting a guardian. If laws in your state allow, you can appoint a guardian to manage the life insurance payout that your child receives. The guardian would also handle your child's other financial expenses. Typically, you'll need an attorney to establish guardianship. To ensure funds are managed appropriately, choose someone you can trust to put your child's financial interests before their own.
Creating a trust. With a trust, you name your children as beneficiaries and establish a trustee to oversee funds. When your child needs money to cover expenses, the trustee can issue the payout. The process usually requires you to pay fees, and you must establish the trust before you die.

Should I Name My Estate as My Life Insurance Beneficiary?

You can designate your estate as your life insurance beneficiary. If you do, the death benefit will be added to the value of the rest of your assets and passed onto your heirs. Naming your estate as your beneficiary does have some potential drawbacks, including:

A life insurance death benefit usually isn’t subject to income tax, but a large estate may be.
If your estate goes through probate, death benefit payouts may be significantly delayed.
Extra fees. The amount of your payout may be reduced due to probate fees.
If someone contests your will following your death, your intended beneficiaries may not receive the death benefit.