A life insurance beneficiary is the person, people, entity, or trust designated to receive the death benefit when the insured person passes away. Naming the right beneficiary is one of the most important decisions when purchasing a life insurance policy, as it determines who receives the financial protection the policy provides. You can name one or multiple beneficiaries and specify the percentage of the death benefit each should receive.
There are two types of beneficiaries: primary and contingent. The primary beneficiary is first in line to receive the death benefit. The contingent (or secondary) beneficiary receives the death benefit only if the primary beneficiary has predeceased the insured or cannot be located. Without a designated beneficiary — or if all named beneficiaries have predeceased the insured — the death benefit typically goes to the insured's estate, which can subject it to probate and potential creditor claims.
Beneficiaries can be individuals (spouse, children, other family members), trusts, charities, or business entities. Many estate planning strategies involve naming an irrevocable life insurance trust (ILIT) as beneficiary to keep the death benefit out of the insured's taxable estate. When naming minor children as beneficiaries, it is generally recommended to establish a trust or name a custodian under the Uniform Transfers to Minors Act, as insurance companies typically cannot pay benefits directly to minors.
It is important to review and update your beneficiary designations periodically, especially after major life events such as marriage, divorce, birth of a child, or death of a beneficiary. Beneficiary designations on a life insurance policy generally override instructions in a will, so keeping designations current is critical for ensuring the death benefit reaches the intended recipients.