What Is a Life Insurance Beneficiary? [Your Ultimate Guide]

Choosing a life insurance policy is a major decision. Deciding on a life insurance beneficiary—the person who will receive the payout if something happens to you— might be an ever bigger one.

Consider this your roadmap to finding the right life insurance beneficiary to fit your family’s needs.

What Is a Life Insurance Beneficiary?

This is the person who will receive the benefit from your life insurance policy if you pass away. The most common reason people take out term life insurance policies is because they’re responsible for financially supporting loved ones. So naming the appropriate loved ones as beneficiaries is a big part of ensuring your policy does what you intend it to.

If you were to pass away, the insurance company would pay out a death benefit to your beneficiaries. Those proceeds can go toward things like your funeral expenses, household bills, childcare, college expenses or anything else.

For most married people, it’s an easy choice to name their spouse as the primary life insurance beneficiary. However, first, it doesn’t have to be that way. Second, there’s no need to restrict yourself to a single named beneficiary. For example, if you’re helping your parents pay for their mortgage, you can set aside a percentage of the payout to help cover the balance on their home.

It’s up to you to decide what percentage of the payout goes to each life insurance beneficiary. Don’t hesitate to ask about having multiple beneficiaries and whether there are any limits on how many you can name.

You can also choose contingent life insurance beneficiaries. In that case, the payout would only go to the contingent beneficiary if the primary beneficiaries are no longer alive. For example, your spouse might be your primary beneficiary, but your child or sibling could be your contingent beneficiary.

Choosing contingents can ensure that the life insurance benefit goes where you want it to, even if your original plans aren’t possible.

Life Insurance Beneficiaries if You’re Married With Kids

Family might’ve meant Mom, Dad and two scrubbed-cheek kiddos in 1950s sitcoms, but that’s not real life. For many of us, family is beautiful, messy and complicated, which can make the beneficiary section of a policy a little trickier.

You might have children from previous marriages or relationships to consider. You might plan to use part of your life insurance benefit to make a charitable donation. If you and your spouse have enough assets between you to take care of your family, a life insurance policy might primarily be there to benefit other loved ones, like siblings. You can be as creative as you like with your plans.

If You’re Single or Have Other Financial Dependents...

When naming beneficiaries, some people might want to factor business partners, extended family or close friends into their life insurance beneficiary equation. Remember, this is your chance to look out for the people who rely on you financially, so set up the distribution in the best way you can to help cover your loved one’s needs.

If You've Got a Blended Family...

Depending on your situation, a life insurance benefit can be one method of setting up an equitable inheritance. For example, you may decide that kids from a previous marriage get the death benefit, while your current spouse and kids retain your house and other assets.

If You're a Single Parent...

If you’re a single parent, you’ll need to take a few extra steps to ensure your kids are properly covered. Life insurance companies won’t pay a benefit directly to a minor, so you’ll need to set up a custodial account like a trust or Uniform Gifts to Minors Act (UGMA) account, with a designated trustee to manage the money. (Here's more on the various accounts you can use to give money to minors.)

You’ll probably want the funds to go to this account, rather than directly to the person who’ll care for your kids if something happens to you. Leaving money to someone else—even a guardian for your kids—means it becomes that person’s legal property. The person wouldn’t have a legal obligation to use it for your children, and if the person is unexpectedly unable to become the kids’ guardian after all, that can add even more complication to your intended plans.

Theoretically, you should be able to trust your kids’ guardian to act in their best interest! But keeping your kids’ money separate is a simpler way to ensure the funds go toward your kids’ needs. If there’s any money left over once your kids have become adults and move out of the guardian’s home, it will still belong to them.

Of course, if you have a complicated family situation or complex financial needs, you should consult a qualified legal and financial professional to help guide you.

If You Want to Name a Trust as the Beneficiary…

Trust funds allow you to dictate not just who should receive the money from your life insurance benefit but how. For example, you can specify that your kids shouldn’t receive the full amount until they reach a certain age, or you can include provisions if you don’t want the money to go to someone with spending or gambling issues. You can set stipulations for how the money is to be used—for example, if it should only go toward education.

When you set up a trust, you also choose someone you (ahem) trust to oversee the distribution of the funds. If you’re interested in potentially setting up a trust, speak to a qualified attorney and/or tax advisor.

Do I Need to Name a Life Insurance Beneficiary at All?

Surprisingly, you may be able to open a life insurance policy without making a particular beneficiary designation at some insurance companies. If you do this, you’ve got two main options other than choosing a named beneficiary.

First, you can designate the policy to go to your estate. That means letting state law determine what happens with the payout benefit. States vary, but many will start with your spouse and children and then move through your family tree to parents, siblings, nieces and nephews or other family until they find a surviving family member.

For example, a couple that wants to include grandchildren but doesn’t know how many they’ll eventually have might find it easier to write out their wishes in the will. That way, they can dictate that certain assets should pass to their grandchildren without updating their life insurance policy or beneficiary designation each time they have a new grandchild.

Still, this is only your best option if there are a lot of moving pieces. Although writing “refer to my will” is a simpler short-term solution, leaving the policy to your estate has drawbacks, too.

Following the directions in your will involves going through probate, which can be a lengthy process. Depending on your situation at the time of your passing, the proceeds may need to be used for other expenses, rather than going to your beneficiaries. If your loved ones will depend on the life insurance payout to help replace income for household expenses, the probate process may take too long and may reduce what they receive, if anything.

Probate records are also public documents, so if you want to keep things private, you should name beneficiaries directly on the insurance policy. Plus, not all insurance carriers let you simply defer to the will.

Three of the Biggest Life Insurance Beneficiary Mistakes

Once you’ve decided who belongs on your beneficiary list, you might feel like your work is done. Don’t fall into the trap of treating life insurance as a “one and done” deal. Here are some common beneficiary mistakes to avoid:

1. Not updating your life insurance policy. Life can take various twists and turns, and it’s all too easy to forget to reflect major changes in your policy. For example, if you divorce and remarry but don’t update your beneficiary, you could accidentally leave the death benefit to your ex. Even if your will leaves everything to your current spouse and kids, it isn’t enough to supersede what’s written in your life insurance policy.

2. Not utilizing “per stirpes.” Per stirpes is a fancy way of saying that each branch of the family should receive an equal share. So, if one of your kids passes away before you, the per stirpes rule says that the child’s share will go to his or her offspring, instead of reverting to the surviving sibling. Per stirpes only goes to the next generation, not a child’s spouse, so you’d need to designate your son- or daughter-in-law as a contingent beneficiary if you want that person to receive the share of the death benefit.

3. Leaving it to your estate without a will. If your beneficiary plans are complex, it can be easier to instruct the insurance company to refer to the plan in your will. The catch is, you need to actually write your will for this to work. If you don’t, the legal process follows state law, which may not align with your wishes. Plus, not every life insurance policy allows you to simply designate your estate as the beneficiary.

Additionally, you might want to consider federal regulations around Social Security when deciding who to name as your beneficiary, to avoid inadvertently disqualifying them from various benefits. For example, someone who gets Social Security because they’re elderly, blind or disabled could see their benefits reduced or suspended if a big inheritance raises their income level.

How Beneficiaries Receive Their Benefits

Filing a claim

If the insured person passes away, the beneficiary will need to contact the insurance company as soon as possible. Often, they’ll be able to do this online (for example, if the insured had a policy through Fabric, the beneficiary could simply message customer support on our website to get the process started).

The beneficiary will generally be asked for some paperwork and supporting evidence to verify that the insured did, indeed, pass away. That will likely mean a certified copy of the death certificate.

Of course, because your beneficiaries need to file a claim with the insurer, that means they need to know that you have a life insurance policy and named them as beneficiaries. If they don't, then the funds are subject to the Unclaimed Life Insurance Benefits Act.

Receiving benefits

There’s no guaranteed time frame by which the beneficiary will receive the death benefit, but this will usually be a much faster turnaround than going through the probate process.

Most life insurance policies have a two-year contestability period. That means that if the policyholder passes away within the first two years of their coverage, the insurer may take a closer look at the cause of death. In some cases, insurance carriers require an investigation to confirm that the cause of death is covered and that the policyholder didn’t answer untruthfully on his or her insurance application.

If the claim takes place after the contestability period and the insurer determines that no investigation is needed and the claim received is in good order, payment of the death benefit will be processed within three business days of receipt.

Claims that are under investigation cannot be paid until the investigation is complete.

Frequently Asked Questions

What happens to life insurance with no beneficiary?

Generally speaking, you’ll usually want to designate a beneficiary at the time you apply for a life insurance policy. That’s because most people choose to apply because there are specific people in their life they want to help if something were to happen to them. (For example, they’re applying for life insurance to help protect a spouse or child financially.)

That said, if you pass away while your policy is active and you don’t have a named beneficiary, or if your beneficiary passes away before you do, then the death benefit from the insurer will become part of your estate and is likely to go through the probate process. That means that a judge would be responsible for determining who should receive the money from the life insurance policy. This is usually determined by who’s most closely related to you.

What if I live in a community property state?

Some states have “community property laws,” which essentially state that you and your spouse are equal owners of all assets. In these states, your death benefit might go straight to your spouse automatically, regardless of whom you’ve named as a beneficiary, unless your spouse has given written consent for you to do otherwise.

Which states have community property laws? Arizona, California, Idaho, Louisiana, Nevada, Texas, Washington and Wisconsin. Alaska, South Dakota, Kentucky, Florida and Tennessee have elective community property laws, which essentially means that married couples get to choose whether to be governed by these rules.

Who can change the beneficiary on a life insurance policy?

In short, the policyholder (or possibly someone who holds power of attorney to make changes on the insured person’s behalf).

Do beneficiaries pay taxes on life insurance benefits?

For the most part, the death benefit from a life insurance policy is tax-free for the beneficiary. A few niche exceptions include:

• If your beneficiaries choose to receive the death benefit in installments rather than all at once, they’ll earn interest on the portion that the insurer holds for them over time. That interest could be taxable.

• If you have a whole life insurance policy and borrow against your cash value, you could be responsible for taxes on any amount that exceeds what you’ve paid into the policy.

• If you have a whole life policy and contribute a very large amount to your premiums, in some cases that could be construed as a “modified endowment contract” and could face taxes.

• If you leave your life insurance benefit to a very large estate, it could be subject to estate taxes.

Here’s more detail on whether and how life insurance could be taxable.

Can a life insurance beneficiary be denied the death benefit?

If the beneficiary is alive and a valid beneficiary (for example, a legal adult), they generally shouldn’t be denied a death benefit if the insured person passes away. In a few rare cases, such as if the beneficiary is incarcerated, it’s possible that they may not be eligible to receive a life insurance payout.

A claim might be investigated by the insurance company under certain circumstances, such as if the insured party committed suicide within the first two years of coverage, or if they misrepresented themselves on their original life insurance application.

What are revocable and irrevocable life insurance beneficiaries?

Some insurers let you designate whether your beneficiary selection should be revocable or irrevocable. A revocable beneficiary is one that can be changed or removed at any time. By contrast, if you are the policyholder and designate an irrevocable beneficiary, you won’t be able to change that selection down the road unless you have the consent of that original beneficiary.

Not all insurance policies have the option to appoint irrevocable beneficiaries. For example, the term life insurance policy offered through Fabric by Gerber Life doesn’t support this option.

There are many ways to set up life insurance beneficiaries of your plan to fit the particular needs of your family, even if you’re outside the cookie-cutter norm. Give careful thought to your beneficiaries and update your policy regularly so you can feel confident that your coverage does everything you want it to do, and helps all the loved ones it should.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

Information provided is general and educational in nature, is not financial advice, and all products or services discussed may not be offered by Fabric by Gerber Life  (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Consult an attorney or tax advisor regarding your specific legal or tax situation. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. The views and opinions of third-party content providers are solely those of the author and not Fabric by Gerber Life.