Life insurance beneficiary rules

If you’re shopping for life insurance, good news: You’re in the right place. (We recommend starting with a free online life insurance quote.)

And if we were to guess, you’re shopping for life insurance because you’ve realized that someone (or someones) depends on you and your income to pay for things, from groceries to rent or a mortgage to everything in between.

That someone is what those in the life insurance industry call a beneficiary, though you might think of them as a dependent. And chances are, you’re thinking about life insurance because you’re wondering how that dependent would pay for things in the event that you’re not around.

A life insurance policy is a good idea — you pay a monthly premium, and in return you get life insurance coverage worth the total value of your policy. For example, for just $13.23 per month, a 25-year-old woman in excellent health could get a 25-year Haven Term policy worth $250,000.

That money would go to your dependents in the event of your death, typically as a (tax-free!) lump sum payout.

Got it? Good. Then you’re ready to learn the ins and outs of naming your beneficiary on your life insurance policy — a spouse, a family member, a friend, or even a charity.

Read on and learn more about beneficiary rules before drafting your beneficiary designation.

What is a life insurance beneficiary?

A beneficiary is the person or entity (such as a trust or organization) whom you designate to receive the proceeds of your life insurance policy in the event of your death.

The beneficiary is typically named by you when the policy is purchased or can be updated later on. You can have more than one, and you can designate someone as your primary beneficiary and contingent beneficiary, which we’ll explain later.

What are the basic rules of naming a beneficiary in your life insurance policy?

You can name one or more beneficiaries and designate the percentage of the death benefits each will receive. For example, you might designate your spouse as the primary beneficiary, who will receive 100% of the death benefits.

Alternatively, you might have multiple adult children. You can name multiple beneficiaries to share those benefits, however you see fit.

Who you can name

When choosing a life insurance beneficiary or beneficiaries for your life insurance death benefits, you can choose just about anyone you want. Typically it’s your spouse or another dependent, but there’s nothing to stop you from naming a charitable organization, a trust (for your children), or even throwing a few percentage points to your favorite neighbor. (Good ol’ Gus.)

You can also name contingent beneficiaries, who only receive a portion of your death benefits under qualifying circumstances (such as the death of a primary beneficiary).

In general, this is a pretty straightforward process. You name a beneficiary, and that person receives the death benefit if something happens to you. That said, there is one special situation you should be aware of, which we go into in more detail below.

If you have a minor child or children

For most people, a partner or spouse will be your primary beneficiary, as that person would take on the financial responsibilities left behind by your death.

The logical next step is to name your children as contingent beneficiaries — that is, they would receive the death benefit if your partner were unable to perform those financial responsibilities. (If, for example, the two of you were killed in the same accident.)

But if your children are minors, they wouldn’t be able to receive the death benefit directly by law. Instead, the life insurance proceeds would be paid to a legal guardian or custodian of the child’s property. If you do not specify a legal guardian or custodian in your will, the court will appoint one based on who the child lives with and who legally has the right to care for the child’s wellbeing.

Suffice it to say, this is a less-than-ideal situation, so it’s best to clearly name a custodian while you’re still alive. (And remember: The custodian should not be the same person as your primary beneficiary — i.e., your spouse — because the whole point is having a plan in case that primary beneficiary dies or is otherwise impaired.)

Something else to consider: Establishing a trust for a minor child. This can help protect the child’s inheritance, provide flexibility in distributing funds, and minimize taxes and other financial risks.

(Not sure where to start? Trust & Will lets you set up a legal trust completely online, and eligible Haven Term policyholders can do so at no cost thanks to our Haven Life Plus bonus rider, a suite of services intended to help you while you’re still living.)

You can also leave instructions in your will that specify who will receive your life insurance death benefits by including a provision called a “testamentary trust.” Not sure where to start? Trust & Will lets you set up a legal will completely online, and once again, eligible Haven Term policyholders can do so at no cost.

Can you change your beneficiary later?

Yes, you can change your beneficiary on your life insurance policy so long as you are still alive. (Being dead makes it harder.)

What if you get divorced? If you named your spouse as the beneficiary on your life insurance policy and now you’re getting divorced, yes, you can (and should!) update your beneficiary designation, provided you’re legally allowed to do so.

If you don’t, your ex-spouse may still receive the life insurance payout in the event of your death. (In some states, however, your ex will automatically be removed as a beneficiary on life insurance policies after a divorce is finalized.)

We should add that, in some situations, a divorced person might be required to get life insurance, with their ex-spouse as the beneficiary, as a way of covering their financial obligations if they die. Suffice it to say, divorce is complicated.

So you know who your beneficiary will be. Now what?

Having someone who depends on you can be a source of great stress, but also a source of great pride. It can give you purpose.

Taking care of that person, even after you’ve died, is a smart way of acting on that sense of purpose. Start by getting a free online quote for a term life insurance policy from Haven Life.