The term "insurance beneficiary" defines a person or entity designated to receive a benefit from an insurance policy. Who can be named a beneficiary and when a beneficiary receives his benefits are determined by the policy and law. Typically, a beneficiary is a component of a life insurance policy, since it is a third party - the beneficiary - who receives the settlement from the policy after an insured's demise.
Selecting a Beneficiary
When selecting a beneficiary, consider the individual or individuals that the policy was purchased to protect. Since an insurance policy is usually purchased to help an individual or group of people with finances after the occurrence of an event, such as a death, naming the person or group of people that the policy is intended to protect as beneficiaries is the key to a beneficiary designation.
If you are unsure who you are purchasing or have purchased a policy to protect, consider:
- Who the money or benefits from a policy are intended to help
- Who would benefit most from the policy
- Why you purchased the policy
These aspects will help you identify whom you wanted to assist through the purchase of a life insurance policy. The name or names that appear most often after you ask yourself these questions are likely the individual(s) or entity that you should designate as the beneficiary.
You typically designate a beneficiary when you purchase an insurance policy. When naming your beneficiaries, be as precise as possible. Give not only the relationship between yourself and the person or entity on the designation form, but also their full legal name. If possible, include the beneficiary's Social Security number, which could save a great deal of confusion, because many people share the same legal name.
Clearly State Your Intent
In addition to specifically naming your beneficiaries, you should be explicit in your instructions about how the policy's benefits should be divided. For example, if you have two beneficiaries, you will want to note whether the benefits are to be divided equally. You will also want to indicate what should happen is one of these beneficiaries is not alive to receive the benefits. This person is the "contingent beneficiary".
Types of Beneficiaries
A minor can be a primary or contingent beneficiary. If, however, a minor receives benefits, a court or the estate administrator will likely require that a third party be designated a trustee for the benefits. This trustee will see that the benefits are disbursed and managed appropriately, until the minor becomes an adult, typically by turning 18. You may be able to name the trustee, depending on the policy.
More than one person can also be named a beneficiary. Any benefits are split equally among multiple beneficiaries, unless the insurance policy, a will, or other legal document states that the intent was for them to be split unequally.
An entity, such as a corporation, can also be named a beneficiary. However, in this circumstance, there may be tax issues that arise that are not a concern when a beneficiary is an individual.
Primary vs. Contingent Beneficiaries
Beneficiaries can be primary or contingent. A primary beneficiary is the first-named and main person who receives the benefits from a policy. A contingent beneficiary is the person you designate to receive the benefits if the primary beneficiary refuses to assume or cannot receive the benefits.
Updating Your Beneficiaries
Once you name your life insurance beneficiaries, you can typically change them or update the information at any time. In rare cases, the beneficiary may be irrevocable, meaning that the beneficiary cannot be changed without the express written permission of the beneficiary.
Common reasons for updating beneficiaries on a policy include a birth, adoption, death, divorce, marriage, or change of name. You do not need to update your beneficiary's contact information, for example if they move.
If you want to see if your information can be changed or to change your prior beneficiary designation, simply call you insurance company and make the request. To do so, you will likely have to fill out paperwork or sign documentation designating the change, just so that everything is formally recorded in writing.
Annual Beneficiary Reviews
Keeping your beneficiaries updated is an important aspect of maintaining your life insurance policy. To make sure you stay on tops of things, it is a good idea to review your life insurance documents annually.