Beneficiaries | Life Insurance Provisions

Beneficiary designation

A beneficiary is the person or entity that receives the policy proceeds when the insured dies. Insurable interest rules don’t apply to beneficiaries. As long as the policy owner had an insurable interest in the insured’s life when the policy was issued, the beneficiary doesn’t need to have one.

For example, you could be named the beneficiary of a policy on the life of a distant relative even if you don’t have an insurable interest in that person.

Revocable vs. irrevocable

If a beneficiary is named revocable, the owner can change the beneficiary without the beneficiary’s consent. Because it offers flexibility, this is the more common designation.

With an irrevocable designation, the owner can’t change the beneficiary or assign the policy without the beneficiary’s permission. In this case, the beneficiary has a vested right to the policy benefits.

Primary vs. contingent

The primary beneficiary is the first person (or persons) entitled to receive benefits. If you name multiple primary beneficiaries, you can split the proceeds among them.

The contingent beneficiary receives benefits only if the primary beneficiary is deceased at the insured’s death. If both the primary and contingent beneficiaries predecease the insured, the final beneficiary is the insured’s estate.

Common beneficiary designations

Individuals:

The most common designation is to name one or more individuals.
If multiple people are named beneficiary, per capita and per stirpes are used.
- Under a per capita beneficiary designation, if one of the named beneficiaries pre-deceases the insured, the remaining beneficiaries divide that person’s share, in addition to receiving their own.
- Under a per stirpes (Latin for “through the root”) designation, the proceeds belonging to the deceased beneficiary don’t go to the other beneficiaries. Instead, they go to the deceased beneficiary’s heirs.

Class designations:

Often used when several children are named beneficiary and the owner wants them to share the proceeds equally, such as “all my children,” rather than naming each child individually.

Estates:

If no beneficiary is named, or if all named beneficiaries have pre-deceased the insured, the final beneficiary is the insured’s estate.

Minors:

A minor may be named as beneficiary if a guardian or trustee is appointed to receive the funds on the minor’s behalf.

Charities:

It is not uncommon for the owner of a life insurance policy to name a charity as beneficiary.

Trusts:

Trusts are often established to receive proceeds from a life insurance policy. When a trust is named as a beneficiary, the trustee may manage the assets according to the trust terms but may not personally benefit from them.

Sidenote

Know this...

An inter-vivos trust is established while the policy owner is still living. A testamentary trust is established to receive life insurance proceeds, but is not a taxable entity until the moment of death.

Beneficiary types

Spendthrift clause

A spendthrift clause lets the policy owner choose a settlement option in which the beneficiary receives benefits over time rather than as a lump sum. It also prevents the proceeds from being assigned or claimed by the beneficiary’s creditors.

This clause is often used to protect beneficiaries from creditors or from poor money management.

Common disaster clause

Most states have enacted the Uniform Simultaneous Death Act. While details vary by state, the general rule is that if the insured and the beneficiary die at the same time, the death benefit is paid as if the insured outlived the beneficiary.

This prevents the death benefit from passing into the beneficiary’s estate (and then being distributed right back out), which can trigger unnecessary legal proceedings, costs, and estate taxes.

A common disaster clause typically adds a survivorship requirement: the primary beneficiary must survive the insured by a certain number of days (usually 30-90 days). If the primary beneficiary doesn’t survive for that period, the death benefit is paid to the contingent beneficiary.

Lesson summary

Beneficiary designation: The beneficiary receives the policy proceeds and may be named revocable or irrevocable. Beneficiaries can be primary, contingent, individuals, estates, minors, charities, or trusts.
Spendthrift clause: Offers a settlement option where proceeds are received over time and helps protect beneficiaries from creditors or poor money management.
Common disaster clause: Ensures that if the primary beneficiary does not survive the insured, the benefit will pass to the contingent beneficiary.

Chapter vocabulary

Definitions

Beneficiary: (1) A person or entity designated to receive benefits under an insurance policy, other than as the insured. (2) In Medicare, any person enrolled in the program.

(2) Any person enrolled in Medicare.

Common Disaster Provision: A provision in a life insurance contract stating that the primary beneficiary must survive the insured for a specified period of time (commonly 30-90 days) in order to receive the proceeds. If the primary beneficiary does not survive the insured for this period, the proceeds are paid to the contingent beneficiary.

Example: Rob names his friend Matt as the primary beneficiary and his wife Yvonne as the contingent beneficiary. Their policy has a 60-day survivorship requirement. Rob dies in an accident, and Matt dies six months later from unrelated causes. Because Matt survived Rob by more than 60 days, he receives the proceeds. Upon Matt’s death, the proceeds become part of his estate.

Contingent Beneficiary: A secondary beneficiary designated to receive the proceeds of a policy if the primary beneficiary predeceases the insured, or dies in a common accident.
Irrevocable Beneficiary: A life insurance policy beneficiary who has a vested interest in the policy proceeds even during the insured’s lifetime because the policy owner has the right to change the beneficiary designation only after obtaining the beneficiary’s consent.
Per Capita (Latin: by heads): Applied to beneficiaries, it refers to division of policy proceeds among the surviving beneficiaries.
Per Stirpes (Latin: by roots): Applied to beneficiaries, it refers to division of policy proceeds among surviving beneficiaries with a full share to the heirs of any deceased beneficiary.
Primary Beneficiary: The beneficiary named first to receive proceeds or benefits of a policy that provides death benefits.
Revocable Beneficiary: The beneficiary in a life insurance policy in which the owner reserves the right to revoke or change the beneficiary.
Spendthrift Clause: A clause that may be written into a life policy providing that a beneficiary or creditor cannot subject the proceeds or payments received under the settlement option to transfer, commutation, or encumbrance, or to any legal action taken by the creditors against the beneficiary.