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How to Choose Your Life Insurance Beneficiary — And Why It Matters

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As you navigate through the different options for life insurance and what they cover, you’ll find each policy has one thing in common: You must designate a beneficiary. It’s a simple request, but deciding on a beneficiary may be more difficult than you think.

If you know how life insurance works, you know you have to consider all the variables. With your life insurance beneficiary, it’s no different. Here, we’ll cover a few tips to ensure you choose the right person.

In this article

  • What is a life insurance beneficiary?
  • How to choose a life insurance beneficiary
  • The bottom line

What is a life insurance beneficiary?

Your life insurance beneficiary is the person or group you choose to receive your policy’s benefits upon your death. You can choose one or multiple people, or even a nonprofit organization or charity.

The most common beneficiaries are loved ones, such as your spouse, children, parents, or close friends. If you’re married with children, it might make sense to name your spouse as the primary beneficiary and your children as secondary beneficiaries. That way, your spouse would receive the life insurance benefits if you died. If both you and your wife died, your children would receive the benefits.

If your children are minors, you can also choose to put that money into a trust, which can be a smart option. Establishing a trust allows you to designate a trustee and rules about how any inheritance should be used to care for your children in the event of your death.

How to choose a life insurance beneficiary

Choosing your life insurance beneficiary may not always be as straightforward as you’d imagine. It’s essential to avoid common mistakes that may lengthen the benefits process upon your death or send funds to the wrong person. As you go through the process, remember, it’s OK to ask questions about life insurance. And you can use these tips to make a more informed decision.

1. Think about why you’re buying the policy

The reason behind buying a life insurance policy will largely dictate who your beneficiary should be. If you want to financially provide for your family after your death, your spouse and/or children might be the best options. And if your children are minors, establishing a trust for them may be your best option.

For business owners, you might be worried about the financial stability of your company if you were to die. In this case, you could designate a business partner as your beneficiary.

2. Choose the best option

There are a lot of options available when you’re choosing a life insurance beneficiary. Here’s whom or what you can choose:

  • An individual
  • Two or more individuals
  • A trust
  • A nonprofit or charitable organization
  • Your estate

If you choose more than one individual, a trust, or your estate, you get to decide how the benefits are distributed between those named beneficiaries.

3. Make sure you name a life insurance beneficiary

If you don’t name a beneficiary, is life insurance worth it? At the end of the day, it’s likely best to name a beneficiary and have the benefits go to whom you’d like them to.

If you don’t name a beneficiary, the court will decide how best to distribute your assets in a situation called probate. There may be court fees that subtract from the sum of your benefits, plus the court could make decisions that you wouldn’t necessarily agree with.

For example, your money could end up with a financially irresponsible family member who may use it in ill-advised ways, effectively wasting your life insurance benefits.

4. Choosing a minor as a life insurance beneficiary

If you’re going to name your children as beneficiaries, keep in mind that minors cannot directly receive money from life insurance benefits. A guardian has to manage any assets that you leave for a minor.

This may get complicated if you don’t have someone reliable who can act as a guardian. In this case, a trust may be a good option. A trust is a legal document that explicitly states how you would like any assets you’ve left for your children to be managed. With a trust, the money and/or assets left behind should be managed exactly as you’d want them to.

5. Consider a revocable vs. irrevocable life insurance beneficiary

An irrevocable life insurance beneficiary is a named beneficiary that has to approve most changes to the life insurance policy. If you’ve named an individual as an irrevocable beneficiary, you cannot take them off your policy unless they approve it. On the other hand, revocable beneficiaries can be removed or changed on your policy as you see fit, without any consent from the beneficiary.

Most of the time, you would want to name your beneficiaries as revocable. This gives you the option to change your beneficiaries at any time. For instance, your children may have finished college and have full-time careers and their own life insurance policies. In this case, you might consider changing who your beneficiaries are, as your children would no longer need the protection of your life insurance benefits.

Irrevocable beneficiaries will often be considered in marriages. If you have children and one spouse is the primary caregiver, they may want the guarantee of life insurance benefits if you die — even if you’re divorced later on. An irrevocable beneficiary can’t be removed from a policy unless they agree to the removal, and that includes ex-spouses. In this case, if you had divorced and then you died, life insurance benefits could still help cover child support and other costs.

6. Select a primary and a secondary beneficiary

The best life insurance companies will tell you that it’s always a good idea to have a backup beneficiary in case something happens to your primary beneficiary. With married couples who have children, the spouse would typically be named as the primary beneficiary.  

However, both parents could die at the same time, potentially leaving the life insurance benefits in limbo if there weren’t more beneficiaries named. If you want to make sure your benefits go to whom they should, name at least a primary and secondary beneficiary.

7. Update your beneficiaries

Choosing your beneficiaries may be a continual process throughout your life. As life events occur and circumstances change, it may be necessary to update who your beneficiaries are.

Let’s say you take out a life insurance policy when you’re a student and you name your parents as beneficiaries. Years pass and now you’re married with children. If you don’t revisit your policy and make some changes, your parents would still be the recipients of any life insurance benefits upon your death instead of your spouse and children.

8. Align your policy with your will

Your will is not the same thing as your life insurance death benefit. You may state who you want to receive your life insurance benefits in your will, but whatever information is listed in your life insurance policy will trump those statements.

As such, it’s essential to align your life insurance policy with your will. Make sure both your will and life insurance policy clearly state the beneficiaries of your benefits and assets. This can prevent any confusion on how to handle your benefits upon your death.

The bottom line

There are many important factors to consider when looking into life insurance policies. If you use these tips, you can better understand how to choose a life insurance beneficiary who will receive your valuable benefits.

Getting life insurance doesn’t have to be a long or costly process. In just five minutes or less, you could be approved for a policy through certain online marketplaces. Often, all you have to do is answer a quick questionnaire and you’ll have a decision within minutes.

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