secondary, and final beneficiaries
name as many beneficiaries as you want, subject to procedures
set in the policy. The beneficiary to whom the proceeds go
first is called the primary beneficiary. Secondary beneficiaries
are entitled to the proceeds only if they survive both you
and the primary beneficiary. A third level of beneficiary
("final" beneficiaries) can be named as well. Final
beneficiaries receive proceeds only if they outlive all other
beneficiaries. Usually aunts, uncles, nieces, nephews, and
charities are named at this level.
name both secondary beneficiaries and final beneficiaries.
You may outlive the primary beneficiary, you may die simultaneously,
or the primary beneficiary may be unable to collect the proceeds.
In these cases, if you have not named secondary beneficiaries,
the proceeds pass to your estate. Proceeds paid to your estate
are subject to all the expenses and delays associated with
settling an estate, whereas named beneficiaries can receive
proceeds almost immediately after your death.
name multiple beneficiaries if you choose. There are no legal
restrictions--and few company restrictions--on the number
of beneficiaries you can designate. The only requirement is
that they must all have an insurable interest in you (e.g.,
spouse, child, business partner, etc.) at the time you apply
for the insurance.
name multiple beneficiaries, you must also specify how much
each beneficiary will receive. You may not want to give each
beneficiary an equal share, so you must state how the proceeds
should be divided. Because of the numerous interest and dividend
adjustments the insurance company must make, the death benefit
check often does not equal the policy's face value. Thus,
it's wise to distribute percentage shares to your beneficiaries,
or to designate one beneficiary to receive any leftover balance.
do you name or change a beneficiary?
buy life insurance, the insurer will provide you with a beneficiary
designation form. Generally, you only need to list the names
of the beneficiaries, sign the form, and date it. When changing
a beneficiary, a similar form is used. It is advisable to
specifically revoke any previous designations by writing this
in on the change of beneficiary form. You may want to review
your beneficiary designation every two or three years. Additionally,
be sure to check and update your designation upon certain
life events (e.g., divorce, remarriage, the birth of children,
make the mistake of thinking that you can change your beneficiary
in your will. A change of beneficiary made in your will does
NOT override the beneficiary designation form. If you want
to change the beneficiary, execute a change of beneficiary
form. Do not rely on your will to do so.
designating the proper beneficiary is important?
is purchased for two primary reasons: to create an instant
estate to provide for your family members, and to solve cash
flow problems caused by your death. To attain these goals,
you want to ensure that all the life insurance proceeds are
received by the beneficiary. To do this, you need to avoid
estate taxes that will deplete these funds. One way to avoid
taxes is to properly designate the beneficiary.
you name your spouse as beneficiary?
people name their spouse as primary beneficiary. But this
may not always be a good idea. If your spouse is the beneficiary,
then the proceeds pass free of estate taxes under the unlimited
marital deduction, regardless of who owns the policy. However,
if the spouse also has a sizeable estate, the proceeds will
be included when he or she dies (unless, of course, they have
been spent). You may only postpone estate taxes, not avoid
if you and your spouse die simultaneously, the Uniform Simultaneous
Death Act (USDA) provides that the beneficiary will be presumed
to have died first. This means that the unlimited marital
deduction will be lost, and the proceeds will be included
in your gross estate.
however, that if you live in a community property state, your
spouse must give written consent before you can designate
anyone else as your beneficiary.
things to think about
careful if you name your estate or your executor
If your estate or your executor is named as beneficiary on
your life insurance, the proceeds will be included in your
gross estate for federal estate tax purposes. If your gross
estate is large enough, estate taxes must be paid. These taxes
reduce the life insurance proceeds available for your family,
and the process of settling the estate will delay the availability
of the insurance proceeds.
your child or spouse may also serve as your executor. In this
case, he or she may be a perfectly appropriate beneficiary.
Just make sure you indicate that the beneficiary is your child
or spouse, and not just the executor of your estate.
careful if you name a creditor, or someone who will use the
proceeds to do you a favor. Occasionally,
a beneficiary is considered by the IRS to be for the benefit
of your estate. When this happens, the proceeds from the life
insurance policy are included in your gross estate for estate
tax purposes. Examples of this include:
a creditor as beneficiary (in payment of a debt)
a beneficiary to receive proceeds under an agreement that
requires him or her to pay your estate's debts or expenses
a beneficiary to receive proceeds to pay alimony or support
can't name any beneficiary if you are incompetent
If you are incompetent, you cannot name or change a beneficiary.
You may be incompetent whether or not you are legally declared
to be so. The test is similar to the test regarding wills
(i.e., do you have the capacity to understand your actions?).
name a minor unless a guardian has been appointed or a trust
Insurers generally will not make settlements directly to minors.
Do not name a minor as a beneficiary unless you also appoint
a guardian or use a trust.
beneficiary in accordance with a divorce decree, settlement
agreement, or state law
Your right to change a beneficiary may be limited by a divorce
decree or settlement agreement. In some states, divorce automatically
terminates a spouse's interest. In other states, divorce allows
a policy owner to change the beneficiary, even if the beneficiary
you are a minor, you may name only a specified class
In some states, if you (the insured) are a minor, you can
name only a certain class of persons as beneficiaries. That
class generally includes your spouse, parents, grandparents,
and brothers or sisters.