Although many people name family members as beneficiaries on their life insurance policies, it is certainly not a requirement. There are almost no rules restricting who you can choose, and you can change your beneficiary at any time (for example, after a divorce). The only universal restriction for life insurance beneficiaries is age. You cannot name a minor as your beneficiary. To provide a person under the age of 18 with death benefits, you would need to designate a legal guardian or a trust as your beneficiary.
If you are married and live in a community property state, there may be rules requiring your spouse to waive his or her rights before you can designate someone else as your life insurance beneficiary. The nine community property states in the U.S. are:
A number of situations exist in which a non-family member may be designated as beneficiary on a life insurance policy. Examples other than family members who could be named as a beneficiary include:
If you fail to name a beneficiary, or your beneficiary predeceases you, the proceeds of your life insurance policy will go to your estate after your death. This means the death benefits will have to go through probate, a legal process in which your debts are settled, and your estate is divided among your heirs. This is not an optimal situation, as probate can take months and creditors may come to life before it is complete.
You can name one or multiple beneficiaries on your life insurance policy. Typically, this is done in two levels – primary and contingent. A primary beneficiary is your first choice to receive your death benefits. A contingent beneficiary is chosen to receive the payout in the event your primary beneficiary dies before you do. Be very specific in designating beneficiaries on a life insurance policy. For example, problems could arise if you designated your husband or your wife, without specifically naming that person, and divorced and remarried later on.
If you have multiple beneficiaries, there are multiple ways to designate how much of the death benefit each will receive. For example, one method is to assign a specific percentage of the death benefit to each named beneficiary. This method may be appropriate if you are naming beneficiaries who are not members of your family.
Naming life insurance beneficiaries can be a complicated process, but it must be done to avoid having the proceeds of your policy go through probate. Our experienced agents are happy to assist you with all your life insurance needs.