Monday, March 07, 2016

How to Set Up Your Life Insurance Beneficiaries

I've talked with thousands of employees over the years about their beneficiaries. Many have some basic questions and others aren't quite sure who to name as their beneficiary. In this article, I want to answer some of the questions I've gotten from employees over the years and talk about what you need to consider when naming your primary and contingent beneficiaries.

Why You Must Always Designate At Least A Primary Beneficiary

From time to time, I'll have an employee tell me they want to list their estate as their beneficiary. When this happens, I explain to them that if they die and the money goes into their estate that it could tie up the money for many months.

But more importantly, money in your estate is subject to all claims from people you might owe when you die. This could include the funeral home, credit card companies, taxes, attorney fees and probate costs. Naming a direct beneficiary allows the money to pass outside the estate. It can then be used immediately and can't be taken by claims against the estate.

When someone dies and money or property transfers to someone else, it goes through a process to see how that money should be transferred. This transfer can be one of three basic types. They are:

  1. Transfer by ownership The first test is to check and see it is jointly owned. If it is, it transfers directly to the other owner outside of your estate. If not, it goes on to the next step.
  2. Transfer by contract The next type of transfer is by contract. A life insurance policy is a contract. When you name a beneficiary, if something happens to you, it transfers contactually to your beneficiary outside of your estate. If you don't name a beneficiary and something happens to you, then it goes to the next step.
  3. Transfer by "will" Anything not transferred by ownership or by contract is then transferred into your estate and distributed however your will says it should be. Now if you don't have a will, which is pretty common, the state usually has one set up for you. A will decides what happens to any money or property in your estate through a process called probate. The probate process requires an attorney and takes several months to complete. This is to allow anyone you owed when you died time to file a claim. All the money in the estate is subject to those claims. Once those claims are settled, any money left, if any, goes to the people you named in your will. 

Keeping your money tied up for months in probate or allowing creditors to take a chunk of it is unnecessary and completely avoidable. If you name a beneficiary, it doesn't tie up the money for months, doesn't allow creditors to take it and allows your beneficiary to keep all of it.

Next, let's get into the types of beneficiaries. 

The Primary Beneficiary - First In Line

The first type of beneficiary is the primary beneficiary. This primary beneficiary is first in line to receive money if something happens and you die.

If you are married, usually you name your spouse as your primary beneficiary. If you have a same sex or domestic partner, you'd probably name your partner. But while most people name their spouse or partner, you can actually name anyone you want as your primary beneficiary unless it's a qualified retirement plan - like a 401(k). In that case,  you are required to name your spouse unless your spouse gives you permission to name someone else. Otherwise you can name anyone you want as your beneficiary.

Because people sometimes have second or third marriages or children from previous marriages, people might not name their spouse and might choose to name their children instead.

Now if you are unmarried, then obviously you can't name a spouse. People name a number of different people in that case. Here's a common list of people chosen to be beneficiaries:

  • Spouse
  • Same sex marriage partner
  • Domestic partner
  • Fiance
  • Children
  • Friend
  • Mother
  • Father
  • Brother
  • Sister
  • Niece
  • Nephew
  • Grandfather
  • Grandmother
  • Trusts
  • Churches and charities

Your situation and the strength of your relationships will dictate who you should name as your beneficiary. But in general, people name who they love as their life insurance beneficiaries because they care for them and want to provide for them.

The important first step is to make sure you name a primary beneficiary. 

The Contingent Beneficiary - The Backup To The Primary Beneficiary

If something happens to your primary beneficiary and they die before you do (or at the same time as you), the contingent beneficiary is the next in line to be your beneficiary. The contingent beneficiary is the second beneficiary or backup to the primary beneficiary.

If you are married with children, the traditional approach is to name your spouse as your primary beneficiary and your children as equal contingent beneficiaries.

Just like your primary beneficiary, you can name anyone you want as your contingent beneficiary on your life insurance.

I do recommend that you name both a primary AND contingent beneficiary in case you and your primary beneficiary die at the same time (where it's normally legally assumed your primary beneficiary pre-deceased you).

Your contingent beneficiary would be needed as a safeguard to keep the proceeds from out of your estate in that situation.

The Tertiary Beneficiary - The Backup To The Contingent Beneficiary

While not used often, you can name a tertiary beneficiary if you want to. A tertiary beneficiary is third in line after your primary and secondary beneficiaries. If you want the additional safeguard, you can name a tertiary beneficiary, but I don't stress the need for a tertiary beneficiary as much as I do the contingent beneficiary.

In most cases, designating a primary and a contingent beneficiary will be enough and I strongly recommend both.

Naming Equal Beneficiaries

An often used beneficiary arrangement is splitting a primary or splitting a contingent beneficiary equally among two or more people.

The most common form is naming your children as equal beneficiaries like "All children equally".

In this case, if you have two children and name all children equally, your children would split the amount and each get one half. If you have four kids, they each will get 25 percent.

You can split beneficiaries among other individuals like parents or siblings. It's all up to you.

NOTE: Remember if you and your spouse have children from separate marriages, it's probably a good idea to specifically name the children you want to be your beneficiaries instead of using the generic "all children equally" designation.

Should I Name A Minor Child As My Beneficiary

Naming minors as beneficiaries brings additional legalities into the equation. Depending on the law where you live, when the minor might receive the money might be in question. They might also need to have some sort of guardian established to manage the money on their behalf.

If you don't have a will, then the state has already decided who the guardian will be and it might be a person you do not want to get the money. For example, an ex-spouse who's the father of one of your children might get the money even if you didn't want them to get it.

So, what a lot people do as a safe guard around this possibility is to name a person they trust to take care of the money on behalf of the minor child instead of naming the minor directly. They might choose a parent or grandparent who they know will take care of the minor child.

CAUTION: Make sure you completely trust who you name as beneficiary if you expect them to carry out your wishes. I remember one lady I talked with who named her spouse from a second marriage as beneficiary instead of naming her kids from a first marriage because they were minors. She told me she was certain he would take care of her children if something happened to her. Unfortunately she died and he didn't use the money for them. Remember, once the money is in your beneficiaries hands, they can do what they want with it. Make sure you know for sure that they will do what you want them to do before you name them.

Can I Name A Trust As A Beneficiary

Yes. You can name a trust as a beneficiary. You'll need to be specific about which trust you are referring to and that it's properly executed. Talk to your attorney who is advising you about your trust to see what they recommend.

You Can Always Change Beneficiaries If You Want

When it comes to your beneficiary designations, you can change them at any time. A beneficiary isn't locked in for life. You'll want to review your beneficiaries if you:

  • Get married
  • Get divorced
  • Have children
  • Feel differently about your relationships

I've seen cases where an ex-spouse received the basic group term life insurance benefits when the new spouse should have gotten them. Unfortunately, the employee didn't get around to changing their beneficiary arrangements after they got divorced or got remarried.

Don't forget to review all of your life insurance policies and other policies that might need a beneficiary in case of death like a critical illness insurance policy. (You could have a heart attack. In that case, you'd still get paid for the heart attack and you would want that money to go to a beneficiary instead of your estate).

Don't forget that if you have life insurance on your children or grandchildren to also review those beneficiary arrangements.

To change your beneficiary, all you have to do is fill out beneficiary change forms which you can do at any time. 


In the end, most people buy life insurance because they love people. If worst happens and they die, they want to help out the they care about. Make sure that you name the beneficiaries you want and set them up properly by setting up both a primary and contingent beneficiary. Think about how you want to handle naming minor children as well as if you think you need a tertiary beneficiary.

I'm not an attorney and I encourage you to talk with an attorney to get additional advice - especially if you don't have a will in place - because an attorney can advise you better about your own personal situation and the laws in your state.

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Michael is a champion of guaranteed issue for employees in the workplace. He's been an insurance agent since 1992 and has worked with thousands of employees.