The beneficiary designation is a short form that decides where a large amount of money goes. The NAIC has observed that these designations are often made quickly, without much thought or advice, which is how a form completed in two minutes ends up governing an outcome for decades.
It is also one of the few insurance decisions you can revisit at any time, at no cost.
Primary and contingent
A primary beneficiary receives the death benefit if they survive the insured. You may name more than one, and if you do, you specify the percentage each receives. Percentages should total 100.
A contingent beneficiary, sometimes called secondary, receives the proceeds if no primary beneficiary survives the insured.
Naming a contingent beneficiary costs nothing and closes a real gap. If the only primary beneficiary predeceases the insured and no contingent is named, the proceeds may end up payable to the estate, which generally means probate, potential exposure to creditors, and delay before anyone receives anything.
Per stirpes and per capita
These two Latin terms decide what happens to a deceased beneficiary's share, and the NAIC has published on the distinction because it produces very different results.
Consider a policy naming three children in equal shares, where one child dies before the insured.
- Per stirpes: the deceased child's share passes to that child's own descendants, who divide it among themselves. The other two beneficiaries still receive one third each. The deceased child's spouse does not inherit that share; it passes to the next generation.
- Per capita: the proceeds are redivided among the surviving named beneficiaries. The two surviving children receive half each, and the deceased child's children receive nothing.
Neither is right in the abstract. Per stirpes generally reflects an intent to provide across generations; per capita generally reflects an intent to provide for the named individuals. What matters is that the form says what you mean, in the language the insurer accepts.
Minor children
Naming a minor child directly as beneficiary is one of the most common designation mistakes.
Insurers generally cannot pay a death benefit directly to a minor. Depending on state law, the outcome is usually a court-supervised guardianship or conservatorship of the funds, with the money turned over to the child outright at the age of majority, which may not be the age you would have chosen.
The NAIC suggests considering a trust or estate arrangement where a beneficiary is a minor. Common alternatives include naming a trust established for the child's benefit, or using a custodial arrangement under your state's transfers-to-minors act. Both let you name who manages the money and, in the case of a trust, when it is distributed.
This is genuinely an area for an estate attorney rather than a form. Rules vary by state.
Revocable and irrevocable designations
A revocable beneficiary can be changed by the policy owner at any time, without the beneficiary's consent. This is the default and what most people want.
An irrevocable beneficiary cannot be removed or have their interest reduced without their written consent. That constraint reaches further than people expect: under NAIC model rules, an irrevocable beneficiary or assignee must sign a concurrence before an accelerated death benefit can be paid, and revised disclosure statements must go to them as well as to the owner.
Irrevocable designations show up in divorce decrees, business agreements and some assignment arrangements. They are not something to agree to casually, because unwinding one requires the beneficiary's cooperation.
Other designation choices worth thinking about
- A spouse, the most common designation, and the one most often left stale after a divorce.
- A trust, which allows control over timing and conditions, and is the usual answer where beneficiaries are minors, have special needs, or where you want protection from a beneficiary's creditors or a divorce.
- An estate, which is generally what you get by default when no valid beneficiary survives, and generally what people should avoid choosing on purpose.
- A charity, which is straightforward but should be identified precisely, by legal name and tax identification number.
- A business entity, in buy-sell and key person arrangements.
- A person with special needs, where an outright payment can jeopardize needs-based benefit eligibility. A special needs trust is the usual tool, and this requires professional advice.
Get the details right on the form
Small errors create large delays at claim time.
- Use full legal names, not nicknames or "my children."
- Include relationship, date of birth and, where the insurer asks, Social Security number, which is what makes a beneficiary findable years later.
- State percentages, not fractions, and make them total 100.
- Say per stirpes or per capita explicitly if you name multiple people across generations.
- Keep contact information current with the insurer.
- Name a contingent beneficiary. Always.
- Tell the beneficiaries. The NAIC has repeatedly noted that benefits go unclaimed because beneficiaries did not know a policy existed. Telling someone the insurer's name is often enough.
Review after every life event
The designation does not update itself, and in most circumstances it controls regardless of what your will says. A will does not override a valid beneficiary designation on a life insurance policy.
Review after:
- Marriage, divorce or remarriage
- The birth or adoption of a child
- The death of a named beneficiary
- A child reaching adulthood
- Establishing or amending a trust
- A change in a business ownership arrangement
- A move to a different state, since state law affects several of these rules
Some states have statutes that revoke a former spouse's designation automatically on divorce, and some do not, and the interaction with federally governed employer plans adds another layer. This is precisely the kind of thing that varies by state and is worth confirming rather than assuming.
Check designations on every policy you hold, including employer group coverage, which is covered in group life through work vs an individual policy. Group coverage designations are frequently the most out of date, because they are made once at hire and never revisited.
When it matters
How the designation plays out at claim time, including payout options and taxation, is covered in how a life insurance death claim is paid.
Beneficiary rules, spousal consent requirements, minor beneficiary handling and divorce-revocation statutes vary by state, and the policy documents control. For your own situation, talk to a licensed agent, the issuing insurer, an estate attorney, or your state Department of Insurance.
To get connected with licensed carriers and agents who write life insurance in your state, you can request life insurance quotes.