How to Choose a Life Insurance Beneficiary

Selecting the right life insurance policy for you and your family is the first step in making sure your loved ones are protected if something should happen to you. But once that happens, you need to name a life insurance beneficiary. That might seem like a simple choice, but in reality, it may be more complicated than you expect.

Or perhaps you’re thinking about changing the beneficiary on life insurance, which can raise questions — for instance, do beneficiaries pay taxes on life insurance? Considerations like this can have some bearing on how you make your decisions.

Naming a life insurance beneficiary isn’t always straightforward, and there’s a lot to consider when you’re planning for how the policy benefits will be distributed. 

Not sure where to start? No need to panic. Getting answers to your questions can help you make wise decisions. A qualified advisor is your best resource, but here are some answers to common questions about life insurance beneficiaries that can help you get started on choosing a life insurance beneficiary.

Question: What Is a Beneficiary?

Answer: A life insurance beneficiary is a person, persons or entity who will receive the death benefit from a policy when the insured person passes away. Usually, the beneficiary is a family member or a trust.

Question: Who Can I Choose as My Life Insurance Beneficiary?

Answer: Everyone who sets up a life insurance policy must name at least one beneficiary — someone to receive the policy’s death benefits. You could choose a person, a trustee, a nonprofit, charity or even your own estate. You can also choose multiple beneficiaries and decide how the benefit will be divided between them. Whoever you choose, make sure they have an insurable interest in your life. This means that they would prefer you stay alive and avoids someone from profiting from your death. 

Question: How Do I Choose a Life Insurance Beneficiary?

Answer: Of course, this decision could seem obvious, but it also could seem challenging. When you’re making that decision, think about why you have a life insurance policy in the first place. Is the purpose to replace lost income for your spouse? If so, they are most likely the right choice for your life insurance beneficiary. Do you want to make sure the family business carries on after you pass? Name someone you trust as the beneficiary who will make sure that the money is used for that purpose.

If you have other assets (such as a 401(k) or IRA) to distribute to a beneficiary, factor those into your decision as well; perhaps those will cover needs for those beneficiaries and you want to direct the death benefit elsewhere. This is also a great time to review the beneficiaries for your 401(k) and, if needed, name beneficiaries.

After you’ve chosen a primary beneficiary, pick a secondary beneficiary as well. If your primary choice passes away, can’t be located or refuses the benefits, having a contingent beneficiary means the policy won’t get tied up in court. Make this choice as carefully as you did when choosing your primary recipient.

Question: Who Should You Never Name as a Beneficiary?

Answer: Believe it or not, there are some people who should never be named as your beneficiary. For example, is your top beneficiary choice on Medicaid? Do they receive Supplemental Security Income (SSI)? Your life insurance benefit could disqualify them from these federal programs. Speak to a financial advisor about how this might impact the beneficiary and take this into account as you’re deciding.

Question: How is the Benefit Divided Between Life Insurance Beneficiaries?

Answer: You have the ability to decide. Do you want your life insurance benefit to be divided between your three children? Or do you want it to be distributed by family? When you divide the benefit per capita, or by person, you can select what percentage of your benefit will go to each person: 50% to your son and 50% to your daughter, for example.

When you divide the benefit “per stirpes,” you’re allocating a percentage of the benefit to a particular branch of the family. Per stirpes distribution ensures the death benefit goes to the beneficiary’s heirs if the beneficiary passes before the policy holder.

Question: Do I Need to Tell My Beneficiaries About My Decision?

Answer: Legally, no. But while discussing plans for after your death can be uncomfortable, don’t let that keep you from notifying the people you’ve named as your primary and secondary life insurance beneficiaries. This can also help you identify any unintended consequences or potential issues with your choices, before it becomes a problem for them.

Question: How Often Should I Update My Beneficiaries?

Answer: Your life insurance contract must be enforced as written, so don’t assume your will can supersede it. If you update one document, be sure to update the other. Ultimately, the beneficiary named in your policy is the one who will receive the benefits. 

And don’t forget to review your will and life insurance policy any time you have a major life change, like divorce, marriage, a significant shift in assets or the birth of a child.

Question: Can I Name a Minor as My Life Insurance Beneficiary?

Answer: State laws dictate how much money a child can receive from life insurance benefits. Speak with your insurance agent or lawyer about how these laws work in your state if you’re considering naming a minor as your life insurance beneficiary. Farm Bureau gives you a few options: (1) We will hold the death benefit until the minor reaches the age of majority, (2) Pay the proceeds to the legal guardian of the minor to use the money for the benefit of the minor or (3) create a trust that spells out exactly how your life insurance is to be used after you pass. 

Got Questions? We Have Answers

It’s a good idea to talk to someone with experience and knowledge when you’re thinking about life insurance beneficiaries. Reach out to Farm Bureau for help understanding your life insurance policy options and choosing what’s right for you.