What a Life Insurance Beneficiary Is & How to Choose One

Buying life insurance protects loved ones by providing for them in case of an untimely death. Choosing a life insurance beneficiary is the most important decision a policyholder can make, as it determines who receives a payout if the policyholder passes. Read on to learn more about what a life insurance beneficiary is and what rules apply to selecting one.

A life insurance beneficiary is the person who receives the death benefit if you die with life insurance in effect. You can choose multiple life insurance beneficiaries, though you'll need to specify what percentage each beneficiary gets. You can also name a trust or a charitable organization as your policy's beneficiary.

If you have life insurance, you should choose a beneficiary who you wish to provide for financially. This could be a spouse, or it could include children, aging parents, or friends. Anyone who would be hurt financially after a death should be considered as a possible life insurance beneficiary.

If you're married

Most married couples choose to make their spouse their beneficiary. In most states, though, there is no requirement to name a spouse as a life insurance beneficiary.

However, this is different in community property states. In community property states, married couples are considered to jointly own assets acquired during marriage. If policy premiums were paid with money earned during the marriage, a spouse is often entitled to 50% of the death benefit unless they consented in writing to someone else being named as a beneficiary.

If you have children

Many people want to ensure their children are provided for if they pass. But it's important to understand life insurance beneficiary rules related to minors. Children can't receive or manage life insurance proceeds until reaching the age of majority. Usually, this is 18 years old. Parents may also not want an 18 year old receiving a large life insurance payout.

Parents can name a guardian or custodian to manage the funds for children. Or they can create a trust that receives the insurance payout. The trustee will manage the money until the children are old enough. Parents can also set certain other conditions on when the children can access funds in the trust.

When buying life insurance, it's important to name a contingent beneficiary. If the primary beneficiary dies before you do, then the contingent beneficiary will receive the death benefit.

It is important to understand the rights of contingent vs. primary beneficiaries. A contingent or secondary life insurance beneficiary receives the death benefit only if the primary beneficiary does not. For example, you could name your spouse as a primary beneficiary and your parent as a secondary beneficiary. If your spouse dies first, then -- and only then -- would the contingent or secondary beneficiaries receive an insurance payout.

Generally, if there is no life insurance beneficiary, your death benefit is paid out to your estate. If you left a will or an estate plan specifying who should inherit your assets, then the life insurance will likely go to that person. If there is no will or estate plan, intestacy laws determine where assets will go. These are state laws aimed at distributing money and property among close family members when someone dies without providing instructions on who should get their property.

To change your life insurance beneficiary, you'll need to contact the insurer and request a change of beneficiary form. Some life insurance companies allow you to do this online.

In general, you should consider changing beneficiaries after a major life event, such as marriage, divorce, the birth of a child, or the death of a primary beneficiary. You may also want to choose a new beneficiary if your circumstances change, such as if the original beneficiary no longer depends on you financially.

It is important to avoid errors when naming a life insurance beneficiary. Here are three common mistakes to stay away from.

Naming a minor child

Minor children won't be given access to life insurance proceeds until they reach the age of majority. If a policyholder wants the money used to provide for them in the interim, they should name a custodian or guardian. Otherwise, the court might appoint someone and the money may not be managed in a way the deceased would have preferred.

Not being specific when naming a beneficiary

It's important to be specific about who will receive the funds.

For example, if a person buys a policy and specifies the money should go to "their children," and then a child they didn't recognize as their own comes forward after death, that person might receive a portion of the proceeds even if the deceased wouldn't have wanted this.

Not updating a beneficiary when needed

The person who's named as a life insurance beneficiary is the person who will receive the death benefit. This is true even if your will specifies that someone else should receive the money.

Not changing the beneficiary when circumstances change is a common mistake. For example, it's important to change a beneficiary after a divorce if you no longer want your ex-spouse to receive the death benefit.

In most cases, a life insurance beneficiary will receive the death benefit as a lump sum. Sometimes, a beneficiary can elect to receive monthly installments instead to provide income over time. Death benefits are typically tax free for beneficiaries.

It is possible to contest a life insurance beneficiary. The person who is contesting will need to prove the chosen beneficiary shouldn't rightfully receive the death benefit.

In some cases, a court will remove a beneficiary if there is clear evidence the policyholder was mentally unstable when they named the beneficiary. The court may also remove a beneficiary if there is reason to believe the policyholder was coerced into naming that beneficiary.

For example, suppose an older person who was sick and losing their mental capacity changed their beneficiary to a new romantic partner right before death. This might be a case where the beneficiary can be successfully removed.