Who should be your life insurance beneficiary?

When my daughter, Lucy, was born, I knew I needed to get life insurance. But as a single parent, I was stumped when it came time to select a beneficiary. Should I name my father, who, at an advanced age, is more focused on his own end-of-life options? I also have two brothers, one who has kids and one who doesn’t. If I were to die, which brother would be up to the task of managing a policy payout?

I’m not alone in my confusion. When I shared my experience, an unmarried friend in a domestic partnership shared her own, entirely different, set of questions when deciding whether the beneficiary on her life insurance policy should be her partner or her parents. “Who should be my beneficiary?” seems to be one of the most asked questions when it comes to life insurance planning and beneficiary designation.

While a good rule of thumb may be to choose the person who would be most financially impacted by your death, the decision can get confusing, especially if you have several people in your life who may have cosigned on loans or mortgages, be actively involved in raising your child, or may financially depend on you.

Knowing what a beneficiary is, what you can expect when it comes to certain life insurance beneficiary rules, and how naming beneficiaries works, may help you narrow down the best decision for your situation.

What is a beneficiary?

A named beneficiary is a person who will receive the payout from a life insurance policy if you were to die. The proceeds from the payout can be used to help pay for financial needs – those that come with death, such as funeral arrangements and other end-of-life expenses, along with day-to-day bills like the mortgage and childcare.

You can name two (or more) people as beneficiaries, outlining the percentage of the policy payout each would be given. You can also name a contingent beneficiary, who could receive the death benefit if something happened to the primary beneficiary.

For some, naming two beneficiaries — say, a surviving partner and a parent — may make sense, especially if both could face financial hardship. For others, one beneficiary, with a contingent beneficiary named, makes the most sense. The latter is what we commonly see at Haven Life.

Who should you name as a beneficiary?

Who you name as the designated beneficiary is unique to your own circumstances. Some may choose a surviving spouse as a named beneficiary while others may name a child or a parent. One substantial reason people purchase a life insurance policy is for peace of mind when it comes to family, knowing that life insurance protection is in place in the event of your death. Think about it this way, your life insurance is really their safety net. If you live with your partner, would they still be able to pay bills or a mortgage without your income? Similarly, if you provide support to your parents, how would they face finances challenging without you around? Would they be responsible for taking on any of your debt?

Maybe your parents cosigned on your mortgage or student loans or helped you out with a downpayment. Maybe your partner had to take a step back from their job when yours relocated.

While what you “owe” everyone in your life is dependent on the terms of those specific agreements, thinking about this question can help you assess how the money from a payout may be used and who the designated beneficiary should be.

Here, some common scenarios new policyholders face when having to select a beneficiary:

I’m married with kids

Congrats, you’ve got it easy. If you’re married with kids, naming a spouse as a primary beneficiary is the go-to for most people. This way, your partner can use the proceeds of the policy to help provide for your kids, pay the mortgage, and ease the economic hardship that your death may bring. This is true even if one spouse is a stay-at-home parent. If he or she were to pass away, how would childcare and household upkeep be paid for? In this case, it could be smart for both spouses to have a policy with their partner named as the primary beneficiary, Don’t forget to also include contingent beneficiaries, which would usually be parents or designated guardians for the kids.

I’m married with no kids

You, too, should have a straightforward decision when it comes to naming beneficiaries. In this case, most people list their partner as a beneficiary and a parent as a contingent beneficiary.

One employee at Haven Life (who is also a policyholder) named her husband as the primary beneficiary and her mom as the contingent beneficiary in case something happened to her partner. The 30-year, $500,000 policy the employee purchased is enough for her husband to pay off the mortgage and have some extra cash to help him live comfortably and financially.

Other beneficiary considerations for married couples without kids: A charity you love, family members who you financially support, a close friend, or your sibling.

I’m a single parent

You may be buying a term life insurance policy to help ensure your child will be taken care of financially if you were to die. You can name a child as a beneficiary, but you should be aware that life insurance companies cannot pay out a policy to a minor. When a minor is a primary beneficiary, most states utilize the Uniform Transfer to Minors Act, which allows the proceeds from a life insurance benefit to transfer to a child’s named custodian. This can get complicated, though, which is why it’s important to list a custodian immediately upon naming a minor as a beneficiary. (For example, at Haven Life, if a minor is listed, we require a custodian to be named in order to complete the beneficiary designations.)

Other options are: naming a trust as a beneficiary on behalf of your child, or you could name a trusted family member, who you know has the best interest of your child in mind, who may also be the custodian named in your will

If you’re a single parent whose financial plans overlap with a family member — for example, maybe you have a multigenerational living arrangement in place — those circumstances should also come into play with your decision.

I’m single with no kids

If your parents or another family member cosigned a mortgage, student loan, or car loan, naming them as a beneficiary will help them shoulder the financial terms of the agreement if you were to die. Additionally, consider who would be likely to take the lead in funeral arrangements for you. Naming this person as a beneficiary can prevent them from the financial burden of a funeral (or help them plan the greatest funeral of all time.)

Remember: you can always change your beneficiary as your life circumstances change. But kudos to you for getting a policy while you’re young and healthy. The long-term cost savings on life insurance are worth it.

I have multiple financial obligations to family members

You don’t necessarily need to choose one beneficiary. With Haven Life, you can choose up to 10 primary beneficiaries, which you can designate how much of a percentage of the death benefit they would receive if you were to die. Of course, the more beneficiaries you name, the less money would go to each. In general, most people name one or two primary beneficiaries, and one or two contingent beneficiaries to ensure that their bases are covered.

How to select a contingent beneficiary

A contingent beneficiary is a person who the life insurance payout would go to if the primary beneficiary was no longer able to receive the insurance benefit (for example, if both you and your partner were to die at the same time). Think of them like an understudy to the primary beneficiary.

For example, if you’re married with kids, a contingent beneficiary could be the guardian named in your will. No one likes thinking about what would happen if both parents were to die at the same time, but going through this thought process can help ensure that your children would be financially taken care of even if you were both no longer here.

When should a beneficiary be a trust?

While I ended up naming my brother as a beneficiary for my life insurance policy — he’s also named as my daughter’s guardian in my will — I could have established a revocable living trust to be named as my life insurance beneficiary as a way to ensure that my daughter be provided with the funds from a policy payout.

The option of creating a trust has benefits for married couples, too. If both were to die, a trust ensures that a life insurance payout will be used for the wishes of the insurance policy owner, and can avoid a lengthy court process.

Establishing a trust can help parents direct how much money and at what age their children receive it. It also provides a trusted family member, friend, or a professional trustee with the ability to provide the needed oversight, guidance, and control to ensure that the funds are used wisely for the long-term benefit of your children.

“The trustee, typically a family member, can distribute the funds to the children per the trust’s specifications,” says Chris Huntley, author of Life Insurance Beneficiaries and Minor Aged Children. “For example, the trust may allow for annual distributions to be made to the new guardian/s to help raise and care for the child, or allow money for his/her first car or tuition for college.”

If considering a trust, consult with a tax advisor to ensure that you aren’t accidentally setting up a situation where proceeds from a life insurance policy will be regarded as a gift. Most of the time, life insurance proceeds aren’t taxable, but if the beneficiary, insured, and policy owner are three different people, you may need to reconsider the structure of your life insurance policy.

When naming a trust as a beneficiary, you must include:

• Name of trust
• Address
• Tax ID number (SSN/ EIN)
• Date of trust
• Type of trust

Common mistakes when naming a beneficiary

Beneficiary designation isn’t always easy, and mistakes can happen. Turns out, naming a minor (without a custodian) as a beneficiary is a relatively common mistake that I’m glad I narrowly avoided making. Knowing what not to do can also help you suss out the best person to name as a beneficiary. Some other things that trip up policyholders when naming a beneficiary:

Not telling someone they are the beneficiary

While this might seem like a surprising scenario, it’s pretty common. No one likes to talk about or even think about death. Talking through your wishes — and hearing your would-be beneficiary’s input — brings up important questions and discussions that can help clarify if you’re on the same page. And, it’ll provide you both with peace of mind. Make sure your beneficiary knows you purchased a policy, how much it’s for and where they can find the details of the contract in the event of your death. Use this time to also make sure all their information, including date of birth, address, up to date contact info and social security number, is accurate.)

Naming a minor as beneficiary

Legally a child under 18, and in some states under 21, can’t access a life insurance death benefit. If you haven’t named a legal guardian or set up a trust to manage the money, the court will handle distributing the death benefit for you, which can get very complicated. There are a few ways to navigate this tricky situation. Often, the easiest solution is to set up a UTMA custodianship with the life insurance company. This ensures that the child receives the full death benefit for the policy. You’ll also need to name a custodian who will be responsible for the assets until your child is no longer deemed a minor by the state (typically between ages 18 and 21). Another option is to set up a trust fund that can receive the life insurance proceeds. If you decide to go the trust route, make sure it specifies how the money should be delivered – installments, a lump sum when the child turns a particular age, etc.

Forgetting to update your beneficiaries

Just like you should review your policy needs after major life events, you should also revisit your policy beneficiaries and the listed information periodically. Common oversights include incorrect contact information, listing a former spouse, or listing a legal guardian when a child is no longer a minor. The last thing a beneficiary should have to worry about when losing a loved one is how to collect the proceeds, which they may need immediately to cover timely expenses.

Not considering government assistance

If your beneficiary receives government assistance of any kind, you’ll want to ensure that receipt of a death benefit from your life insurance policy won’t disqualify them from further assistance. For example, if you have a special needs child and name him or her as your beneficiary, they may no longer be eligible for government assistance because of the sum of the “gift.” This is another instance where you’d want to look into naming their legal guardian as the beneficiary or establishing a special needs trust fund.

Assuming a will covers all updates

Your life insurance policy is a legal contract, which means the terms listed on it are the ones that go into effect if you die. Your will does not control or trump this contract. For example, if your will lists the beneficiary as your husband and the life insurance policy has your ex-husband listed as the beneficiary, the death benefit will be paid to your ex. Best to avoid that potentially uncomfortable situation altogether by consistently monitoring your beneficiary designations.

(Accidentally) making your death benefit taxable

Here is where things can get pretty tricky. Typically, a life insurance death benefit is received free from federal income tax. However, some beneficiary arrangements may cause the death benefit to be included in the insured’s estate. If you are planning on making significant changes to your beneficiary, you should consult an expert or your insurer first to make sure you are aware of the tax implications.

Beneficiaries: The heart and soul of life insurance

The purpose of purchasing a life insurance policy is to help provide financial protection for your loved ones. To do that, you must name someone as the beneficiary.

It’s important not to treat naming a beneficiary like a checkbox in your life insurance application process. Be thoughtful about who you are naming as a beneficiary, the information you provide on them and periodically check in to ensure accuracy.

No matter what your personal circumstances are right now, two things are clear: Buying a life insurance policy now, rather than later, means you can lock in lower rates, since the younger and more healthy you are, the less you’ll pay in premium. For instance, a 30-year-old woman in excellent health may be able to purchase a 30-year, $500,000 Haven Term policy, issued by MassMutual or its subsidiary C.M. Life, for around $26 a month.

Additionally, you should remember to assess whether you need to make any beneficiary changes if your life circumstances change. A few extra minutes maintaining your policy can provide a whole lot of peace of mind down the road.

The time your term life insurance is in place could be filled with many huge life milestones like getting married, buying a home, having a child … having a second child — all of which will benefit from the peace of mind that affordable coverage was secured long ago. Due diligence early on and throughout the life of your policy would save your loved ones unnecessary stress and potentially a lot of money if anything were to happen to you.