A life insurance beneficiary is a person or entity that is eligible to receive death benefits when the insured party dies. There are several types of beneficiaries. These types of beneficiaries include primary beneficiaries, contingent beneficiaries and irrevocable beneficiaries.
- Primary Beneficiary
- Primary beneficiaries compose the class of persons or entities that is first in line to receive benefits. This is typically a spouse or a child, but it can also be a company.
- This class can consist of more than one person. A father might name his two children as primary beneficiaries to receive equal percentages of his life insurance proceeds.
- The amounts that the primary beneficiaries receive do not have to be equal. A father might name a business partner as of his beneficiaries in order to clear a debt. The business partner might receive a flat amount and the remaining beneficiaries might receive a percentage of the remaining amount.
- Contingent Beneficiary
- Contingent beneficiaries are second in line to receive the proceeds of a life insurance policy. The contingent beneficiaries can only receive benefits if all of the members of the primary beneficiary class have predeceased the insured person.
- Revocable Beneficiary
- A revocable beneficiary can be replaced by another beneficiary at a later date. So long as the insured is still alive the owner can change the person or persons who are named as a beneficiary
- Irrevocable Beneficiary
- An irrevocable beneficiary cannot be changed one named.
Beneficiaries are typically of the revocable variety. However where there are concerns about estate taxes, irrevocable beneficiaries are sometimes named. Estate tax issues are beyond the scope of this blog post, but may be covered in a future post.
Life insurance pricing is typically unaffected by the choice or type of beneficiary chosen. This is the case whether you are purchasing a cheap $5000 life insurance for a typical senior citizen or a $5,000,000 policy for millionaire.
It is important to be thoughtful about naming your beneficiaries. Giving money directly to a minor child could have unintended consequences.
It is also important to update your beneficiaries should certain events occur. Failing to update your policy after a beneficiary has passed away or after a divorce could result in the wrong person or people receiving your life insurance proceeds.
If your policy does not have a beneficiary because your named beneficiary predeceases you, your life insurance proceeds can become part of your estate. This could subject your life insurance proceeds to unnecessary taxation.