A beneficiary is a person or entity who receives the proceeds of a life insurance policy when the insured dies. To qualify as a beneficiary, a person or entity must have an insurable interest that would suffer significant loss if the insured person dies.

There are many different kinds of beneficiaries. They include:

  • An individual (a person identified by name and relationship)
  • A group of individuals (such as the children of the insured)
  • Trusts
  • Financial institutions
  • Charitable institutions
  • Partners within a partnership
  • Corporations
  • Corporate shareholders

Beneficiaries are designated as primary or contingent and both can be included on a single policy.

  • A primary beneficiary is entitled to the proceeds of the policy upon the death of the insured. These rights, however, expire if he or she predeceases the insured.
  • A contingent (or secondary) beneficiary is entitled to the policy proceeds if the primary beneficiary’s rights expire. Establishing contingent beneficiaries insures the insurance proceeds will be distributed according to the wishes of the policy owner rather than by state or federal law, which would otherwise decide if there are no surviving beneficiaries. As such, it is wise to have several contingent beneficiaries listed.

Beneficiaries can be further classified as revocable or irrevocable.

  • If a beneficiary is designated as revocable, the policy owner reserves the right to remove that beneficiary. The policy owner may change a revocable beneficiary’s status and exercise any other policy rights without anybody’s consent.
  • An irrevocable beneficiary, conversely, cannot be removed without the consent of that beneficiary. While this arrangement is sometimes desirable for estate planning purposes, the legal status of an irrevocable beneficiary is unclear. Irrevocable beneficiaries are sometimes treated like co-owners of a policy and therefore must provide consent before the insured can exercise any policy rights. On the other hand, some have contended an irrevocable beneficiary’s consent is needed only for exercising a change in beneficiaries.

The policy owner should clearly indicate his or her wishes when designating beneficiaries.  A change in family or business circumstances after a policy is initially written, such as a divorce or business dissolution, could leave the policy owner with unintended beneficiaries.

*The material provided in this article is for informational purposes only.  We do not provide legal, tax or accounting advice.  Please contact your own advisers for legal, tax and accounting advice.