How to Pick a Life Insurance Beneficiary

iQuanti: When you take out a new life insurance policy, the most pressing consideration is which beneficiary (or beneficiaries) will receive the money if you pass on. 

While many people may believe that you need to designate an individual, like a spouse or child, the truth is there are other options for beneficiaries, including a trust account or your favorite charity. 

Here's what you need to consider when selecting the beneficiary for your life insurance policy. 

How to Divide Money Amongst Beneficiaries 

Before you choose where the money from your policy will go, it's essential to understand how to designate the beneficiary. 

A primary beneficiary is the first in line to receive benefits if something happens to you. You can choose to have only a primary beneficiary or one or more secondary beneficiaries. These secondary beneficiaries act as backups to receive the benefit if you and all of your primary beneficiaries are deceased. In addition to designating primary and secondary beneficiaries, you can also allocate certain percentages to each. 

For example, let's say you're married with a spouse and two children. You can name your spouse as the primary beneficiary at 100% and your two children as secondary beneficiaries at 50% each. That means if your spouse is alive upon your passing, they'll receive 100% of the proceeds. But if your spouse is also deceased, your two children will split the life insurance payout 50/50. 

Types of Beneficiaries 

There are several options to consider as you prepare to identify your life insurance beneficiary. 

Individuals 

Often, for people who are married, their spouse is listed as the beneficiary on a life insurance policy. But if you have more than one person you'd like to receive the money, you're free to divide it as you see fit. 

Trusts 

Trusts are typically used by those looking to provide for loved ones while also retaining some control over how the money is distributed as well as maximizing tax efficiency. If you have an estate tax concern, using an Irrevocable Life Insurance Trust (ILIT) may be an option that can have more favorable tax treatment and financial advantages for your heirs. 

Charities 

Choosing to give money to a charity can be a great way to solidify your legacy by supporting a cause you cherished during your life. And setting up a charity as your life insurance beneficiary is as simple as writing in the charity name in your beneficiary slot. 

Charities are also popular options as contingent or secondary beneficiaries. That means if you only list a spouse as the primary beneficiary and the charity as secondary, if your spouse were to pass away before or with you, the charity would receive the proceeds of your policy. This can be particularly useful for permanent life insurance, which has a guaranteed death benefit as long as your policy is active. 

How Does Life Insurance with No Beneficiary Work? 

Failure to name a life insurance beneficiary means the amount payable on death will go to your estate. And since estate probate can be quite a lengthy legal process, it could take a long time before your heirs see any of the money. That's especially concerning if they'd need to have money quickly to cover the costs of your funeral. 

It's wise to name a beneficiary and keep that list updated as situations change. For example, if you have a new child, get divorced, or get remarried, it's a perfect opportunity to re-visit the policy and add or remove beneficiaries as needed. 

The Bottom Line 

The beneficiary on your life insurance doesn't need to be a person, but it's wise to name some kind of person or entity to avoid the policy being handled as part of your estate. Keeping beneficiaries up-to-date means the individual, trust or charity you choose can quickly receive the proceeds, and your legacy will pass on as you designed.