Who Gets My Life Insurance When I Die?

Most often, life insurance is purchased as income replacement in the event of the early death of the insured. We purchase a life insurance policy to provide for our families so they will have the money they need for living expenses and financial obligations. This might include mortgages, car payments and other debts, college education, or other living expenses. Settlements from life insurance payouts are usually tax-free.

However, the structure of the policy is an important consideration to ensure that the life insurance policy provides for those you've intended. Now onto the question, "who gets my life insurance when I die?"

Life Insurance Primary Beneficiary

When binding a life insurance policy, you'll be asked to name a primary beneficiary. This is the person to whom your life insurance settlement will be paid in the event of your death. Many people name their spouse, but your primary beneficiary can be virtually anyone, or even a charity or a trust.

Life Insurance Contingent Beneficiary

During the process of binding your life insurance policy, you may also be asked to name a contingent beneficiary. A contingent beneficiary is a person to whom your life insurance settlement will be paid in the event of your death and the prior death of your primary beneficiary.  

For example, if you had named your spouse as your primary beneficiary and both you and your spouse were in a fatal car accident, your life insurance settlement will be paid to your contingent beneficiary, if you named one. The same is true if your primary beneficiary was predeceased,  meaning they died before you, but the life insurance policy had not been updated.

It's best to name both a primary beneficiary and a contingent beneficiary for your life insurance policy and to review these selections as well as your coverage every year or two. Divorce, marriage, or other life changes may create good reasons to modify your life insurance policy,  including coverage amounts, term length, life insurance type, or beneficiaries.

Without a contingent beneficiary, and In the event that your primary beneficiary is predeceased, your life insurance settlement goes to the estate of the insured. This can trap the funds in a long, legal tangle, possibly involving probate which includes verifying that wills are valid, etc.

Anyone who inherits the proceeds would then be taxed on the proceeds along with anything else inherited, creating both a delay and a large reduction in the usable benefit amount. The probate process can take a few months to a year, during which time the life insurance settlement can’t serve its intended purpose of providing income replacement.

A lot of financial damage can happen during the delay, particularly if there is mortgaged property owned by the deceased.

Naming Specific People

If choosing specific people as your beneficiaries, you’ll want to be as specific as possible. Simply naming, “my children” may result in some children who may or may not belong to you vying for the payout.

Providing less specific information can also create delays because the insurer may need to find the beneficiaries. This process is expedited by giving as much identifying information as possible, including social security numbers.

Revocable and Irrevocable Life Insurance Beneficiaries

The beneficiaries for your life insurance policy can be either revocable or irrevocable, depending on how your policy is structured.

Revocable beneficiaries: If you have a revocable beneficiary, you can change the named beneficiary of your life insurance policy without the consent of the previously named beneficiary. This selection may be the best choice for most policies because it allows for life changes such as divorce, remarriage, the decease of the named beneficiary, or any number of other reasons.

Irrevocable beneficiaries: A life insurance policy with an irrevocable beneficiary means that the policy’s beneficiary cannot be changed without the consent of the original named beneficiary.  Again, in the case of divorce or estrangement, or other reasons, it may be difficult to get the signed consent of the original named beneficiary. Without consent, you won't be able to change the policy beneficiary to meet your current needs if your life insurance needs have changed.

How do I Choose Who Gets my Life Insurance when I Die?

To help in choosing a life insurance beneficiary, it’s easiest to think of who will suffer financially if you die early and can no longer contribute. For most people, this is their immediate family and they are the named beneficiaries for the policy, with a spouse typically named as the primary beneficiary. It may also be a business partner, or for some, there may be no one who is dependent upon them financially.

Although a life insurance policy can have a business, a trust, or even a charity as the named beneficiary, most life insurance policies name family members or domestic partners as the named beneficiary. Family members are often named as contingent beneficiaries as well.

Spouse or Domestic Partner: Choosing who gets your life insurance when you die is often a matter of need and responsibility. Because life insurance is so frequently purchased as a means of income replacement in the event of early death, spouses or domestic partners tend to top the list of common beneficiaries. Some also select siblings, parents, or other family members as a named beneficiary for their life insurance policy.

Other Adults: You may choose to name someone other than a spouse or relative as the beneficiary of their life insurance policy. You can name any person. The law does not require that you name a family member. However, in some community-property states, your spouse may contest the beneficiary.

Children: It may be tempting to name a child or children as a primary or contingent beneficiary, but this can be counterproductive if you have not named a legal guardian or created a trust to receive the settlement. Life insurance companies will not pay out a life insurance settlement directly to a minor.

Be aware that even with a legal guardian, which the life insurance company may require if a minor is named as a beneficiary, there may also be a requirement that a court approve the legal guardian before the proceeds can be paid. If choosing a minor as a primary or contingent beneficiary for your life insurance policy, consult with an attorney or trusted advisor first.

Having the proper legal structure in place can help ensure that your life insurance settlement can be used as you intended it to be.

Estate: It's also possible to name your estate as the beneficiary or contingent beneficiary of your life insurance policy. Most policies aren't structured this way, at least not intentionally, instead naming an actual person or organization as the primary and/or contingent beneficiary of the life insurance policy.

Naming your estate as a beneficiary is likely to create a tax liability for the inheritor, thereby reducing the benefit amount. Additionally, life insurance proceeds paid to an estate may be subject to the probate process, creating risk not only of taxability but also that creditors may be paid with all or part of the proceeds instead of the money reaching relatives or intended heirs.

Trusts: You can name a trust as the beneficiary of your life insurance policy, but the trust must be established before you bind the policy. Some families or individuals may find a financial benefit in using a trust as a beneficiary.

Using a trust as often associated with policies designed to provide for dependent minors. Most life insurance policies name an individual for both the primary and contingent beneficiaries because the less complicated structure helps to ensure the money from the life insurance settlement is available as quickly as possible.

Charities: A charity can be named as either a primary or contingent beneficiary. Charities, if named as beneficiaries, are often the contingent beneficiaries. With this structure, if the primary beneficiary predeceases the insured, the proceeds of the policy settlement are paid directly to the charity.

Key Person Life Insurance: In some businesses, one or more employees may be considered to be key employees, meaning the business would suffer significant financial loss in the event of that person's death. In this case, it's common for businesses to purchase key person life insurance which insures against the death of key personnel.

Another common use for key person life insurance is in the case of partnerships, in which one partner names the other partner as a beneficiary, allowing the proceeds to buy out his or her stake in the business if the insured policyholder dies.

Multiple Beneficiaries: There are ways to structure your life insurance policy so that the proceeds can go to many individuals, but this is a more complicated structure and should be considered carefully before chosen. It's also recommended to discuss this structure with an expert advisor. Your options include Per Stirpes and Per Capita.

Per Stirpes means the proceeds are divided by branch of the family. Per Capita means that the proceeds are distributed by member.

If considering multiple beneficiaries, structure your policy to pay out a percentage as opposed to a fixed dollar amount because the cash value and payable benefit of a policy may differ from the amount of coverage originally purchased. A whole or universal life insurance policy purchased decades ago may pay out a considerably higher settlement if the cash value has grown significantly.

Choosing to split this payout using dollar amounts can result in a left over portion which may be subject to probate and legal battles.

Ultimately, who gets your life insurance settlement when you die is decided by you when you bind the policy or when you update the policy beneficiary. For most families or individuals, this is a fairly straightforward decision, with spouses or immediate family members being named as primary and contingent beneficiaries. However, life changes and sometimes beneficiaries need to be changed as well.

In other cases, such as providing for minors, insuring business interests, or splitting the life insurance proceeds between multiple beneficiaries, more careful consideration needs to be given to the decision and legal entities may need to be formed prior to binding the life insurance policy.

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