Naming a life insurance beneficiary: Everything you need to know

Life insurance is an important part of your financial plan. It can provide financial protection for your family after you pass away and help them meet their needs. To make sure the money goes where you intend, you'll want to identify a life insurance beneficiary or multiple beneficiaries.

While that may sound simple, there are some things to consider before making your selection. Here's an overview of the process and everything else you need to know about life insurance beneficiaries.

Your beneficiary is the named person, group, organization or other entity that will receive the life insurance death benefit payout after you pass away. It's a key element of the insurance contract that you'll need to be ready to identify when you purchase it.

Naming a beneficiary leaves no confusion about who you want to receive the death benefit and streamlines the payout process so it can happen much more quickly.

Life insurance contracts may be in force for a long time, and life can change a lot over the years. Your family may grow or change as people get married, divorce or pass away. Accordingly, it's important to select both primary and contingent beneficiaries.

Primary beneficiaries are the first in line to receive the death benefit. Spouses are often the primary beneficiary, but it can be anyone you choose. When it comes time for the payout, if the primary beneficiary is deceased, cannot be found or is otherwise incapable of accepting the death benefit, then the contingent beneficiary will be the next in line to receive it. Children are commonly listed as contingent beneficiaries, but again, it can be anyone you choose.

If you don't list any beneficiaries on your life insurance contract, it won't be clear who should receive the death benefit following your passing. This uncertainty can increase the amount of time it takes for your loved ones to receive the payout or could prevent it from going where you intended. Depending on the contract details, it may be paid out according to a default order of survivors stipulated in the insurance contract or possibly to your estate.

If the death benefit is paid out to your estate instead of directly to beneficiaries, it will be settled along with everything else in your estate during the probate court process. Probate can be expensive, public and lengthy, so it's better if your life insurance isn't caught up in it.

Naming a beneficiary is as simple as filling out the appropriate fields on your insurance contract application. Fill in this information as completely as possible to include every beneficiary's full legal name, contact information and Social Security number (or tax ID number if your beneficiary is an organization). This information will be used to locate and identify them, so take extra precautions that the information is accurate.

You can name more than one beneficiary for both the primary and contingent categories. If you do, you'll also need to specify how much of the death benefit should go to each. Let's say you have two beneficiaries and want the death benefit to be split equally between them. You'd specify that each should receive 50%. But you don't have to divide it evenly; you could give 75% to one and 25% to the other. How you allocate the payout among multiple beneficiaries is entirely up to you.

In most instances, you can select any person, group, organization or other entity to be your life insurance beneficiary. Who you choose is a matter of preference and what your intended goal for the money is.

For most people, naming their spouse as the primary beneficiary on a life insurance contract is the standard choice. The idea is that the spouse may depend on the income the insured person provides, and the life insurance proceeds will make up for that lost financial support. This is true whether the spouse is still working or retired and receives any sort of pension or Social Security benefits.

If you aren't married or your spouse doesn't need the money from your life insurance contract, then your adult children are another option to consider as primary beneficiaries. Life insurance used in this way can be a wise estate planning tool because it will allow the money to bypass the probate process and may have tax advantages.²

Life insurance death benefits generally won't be paid directly to minors. Instead, their legal guardian will be in control of the money until the minor reaches the age of majority, which varies by state law. If you want to leave your life insurance benefit to a minor, it may be better to set up a trust or Uniform Transfers to Minors Act (UTMA) account that has been established for the minor's benefit.

If someone depends on you for their ongoing care, such as a family member with a disability, life insurance is one way to ensure they will continue to be taken care of financially after you pass away. However, it's important to know that naming them as beneficiaries could interfere with any government-provided assistance they receive.

It may make more sense for you to establish a special needs trust and then name the trust as the beneficiary of the life insurance contract. This can help make sure that your loved one receives as many benefits as possible without affecting their other resources. It's especially important to consult with an expert before making any decisions in this situation.

You can name any charitable group as the beneficiary on your life insurance contract. Doing this can allow you to support a cause you care about even after you pass. The process for naming a charity as a beneficiary is the same as it is for naming a person—you'll simply identify the organization and the appropriate contact information on your life insurance application.

Business partners may wish to name each other as beneficiaries on their life insurance contracts. This is so that the surviving partner potentially can have adequate cash on hand to buy the deceased partner's share of the business from their family or estate.

The policyholder usually can change beneficiary designations at any time and for any reason, and there are many reasons why they might choose to do so.

For instance, if your family situations change after you initially purchase the contract and designate beneficiaries, you probably will want to make updates. Perhaps you had two children when you first purchased the contract and listed them each as beneficiaries. If you have another child after the contract is in effect, you may want to add them as another beneficiary and change the allocation percentages. Divorce is another common reason to update beneficiaries. In some situations, life insurance death benefits have even been paid out to ex-spouses because the policyholder passed away before naming a different beneficiary.

To update your beneficiaries, you just need to ask your insurance company for the appropriate form, fill it out and submit it.

While you generally can change beneficiaries as you see fit, there are a couple of exceptions to note:

• If you're married and live in a community property state, you may need your spouse's permission to modify the beneficiaries on a life insurance contract.
  
• If you've named irrevocable beneficiaries, you'll need to get their permission to remove them. Usually, life insurance beneficiaries are revocable (meaning you can change them whenever, for whatever reason and without notice), but you may have had reasons to name irrevocable beneficiaries. If you did, you'll have to do a bit more work to change them.

An aspect of naming a life insurance beneficiary that may be confusing is how your contract's death benefit is paid out when you have more than one beneficiary, and one passes away before you do. This situation can arise if, for example, you have four primary beneficiaries listed on the contract with 25% going to each, but one of them predeceases you.

What happens to that beneficiary's 25% depends on whether you make the per stirpes or per capita election.

• Per stirpes. The amount that would have gone to the beneficiary is instead given to their heirs (most likely their children).
  
• Per capita. The amount that would have gone to the beneficiary is instead divided evenly among the remaining named beneficiaries.

Significant financial decisions can be stressful, but you don't have to make them on your own. Knowledgeable, objective professionals can help you. Consider connecting with a local Thrivent financial advisor for all of your life insurance needs, including any questions about evaluating and naming beneficiaries.