Primary, secondary, and final beneficiaries
You can name as many beneficiaries as you want, subject to procedures set in the policy. The beneficiary to whom the proceeds go first is called the primary beneficiary. Secondary beneficiaries are entitled to the proceeds only if they survive both you and the primary beneficiary. A third level of beneficiary ("final" beneficiaries) can be named as well. Final beneficiaries receive proceeds only if they outlive all other beneficiaries. Usually aunts, uncles, nieces, nephews, and charities are named at this level.

You should name both secondary beneficiaries and final beneficiaries. You may outlive the primary beneficiary, you may die simultaneously, or the primary beneficiary may be unable to collect the proceeds. In these cases, if you have not named secondary beneficiaries, the proceeds pass to your estate. Proceeds paid to your estate are subject to all the expenses and delays associated with settling an estate, whereas named beneficiaries can receive proceeds almost immediately after your death.

Multiple beneficiaries
You may name multiple beneficiaries if you choose. There are no legal restrictions--and few company restrictions--on the number of beneficiaries you can designate. The only requirement is that they must all have an insurable interest in you (e.g., spouse, child, business partner, etc.) at the time you apply for the insurance.

If you name multiple beneficiaries, you must also specify how much each beneficiary will receive. You may not want to give each beneficiary an equal share, so you must state how the proceeds should be divided. Because of the numerous interest and dividend adjustments the insurance company must make, the death benefit check often does not exactly equal the policy's face value. Thus, it's wise to distribute percentage shares to your beneficiaries, or to designate one beneficiary to receive any leftover balance.

How do you name or change a beneficiary?
When you buy life insurance, the insurer will provide you with a beneficiary designation form. Generally, you only need to list the names of the beneficiaries, sign the form, and date it. When changing a beneficiary, a similar form is used. It is advisable to specifically revoke any previous designations by writing this in on the change of beneficiary form. You may want to review your beneficiary designation every two or three years. Additionally, be sure to check and update your designation upon certain life events (e.g., divorce, remarriage, the birth of children, etc.).

Don't make the mistake of thinking that you can change your beneficiary in your will. A change of beneficiary made in your will does NOT override the beneficiary designation form. If you want to change the beneficiary, execute a change of beneficiary form. Do not rely on your will to do so.

Why designating the proper beneficiary is important
Life insurance is purchased for two primary reasons: to create an instant estate to provide for your family members, and to solve cash flow problems caused by your death. To attain these goals, you want to ensure that all the life insurance proceeds are received by the beneficiary. To do this, you need to avoid estate taxes that will deplete these funds. One way to avoid taxes is to properly designate the beneficiary.

Should you name your spouse as beneficiary?
Most married people name their spouse as primary beneficiary.  If your spouse is the beneficiary, then the proceeds pass free of estate taxes under the unlimited marital deduction, regardless of who owns the policy. However, if the spouse also has a sizeable estate, the proceeds will be included when he or she dies (unless, of course, they have been spent). In the later case, you may end up only postponing estate taxes, not completely avoiding them.

Additionally, if you and your spouse die simultaneously, the Uniform Simultaneous Death Act (USDA) provides that the beneficiary will be presumed to have died first. This means that the unlimited marital deduction will be lost, and the proceeds will be included in your gross estate.

Be aware, however, that if you live or move to a community property state, your spouse must give written consent before you can designate anyone else as your beneficiary.

Other things to think about
Be careful if you name your estate or your executor
If your estate or your executor is named as beneficiary on your life insurance, the proceeds will be included in your gross estate for federal estate tax purposes. If your gross estate is large enough, estate taxes must be paid. These taxes reduce the life insurance proceeds available for your family, and the process of settling the estate will delay the availability of the life insurance proceeds.

Of course, your child or spouse may also serve as your executor. In this case, he or she may be a perfectly appropriate beneficiary. Just make sure you indicate that the beneficiary is your child or spouse, and not just the executor of your estate.

Be careful if you name a creditor, or someone who will use the proceeds to do you a favor
Occasionally, a beneficiary is considered by the IRS to be for the benefit of your estate. When this happens, the proceeds from the life insurance policy are included in your gross estate for estate tax purposes. Examples of this include:

• naming a creditor as beneficiary (in payment of a debt)
• naming a beneficiary to receive proceeds under an agreement that requires him or her to pay your estate's debts or expenses
• naming a beneficiary to receive proceeds to pay alimony or support

Don't name a minor unless a guardian has been appointed or a trust is used
Insurers generally will not make settlements directly to minors. Do not name a minor as a beneficiary unless you also appoint a guardian or use a trust.

Name a beneficiary in accordance with a divorce decree, settlement agreement, or state law
Your right to change a beneficiary may be limited by a divorce decree or settlement agreement. In some states, divorce automatically terminates a spouse's interest. In other states, divorce allows a policyowner to change the beneficiary, even if the beneficiary is irrevocable.

Learn More...

Life Insurance Overview | Understanding The Basics | Term & Cash Value
Coverage Amounts | Reading Policies | Planning Concerns | Life Calculator | Life Glossary

Please Note: The information contained in this Web site is provided solely as a source of general  information and resource.  It is a not a statement of contract and coverage may not apply in all areas or circumstances.  For a complete description of coverages, always read the insurance policy, including all endorsements.