Choosing a Life Insurance Beneficiary: Seven Mistakes to Avoid

In this article, you’ll learn the answers to the most common questions people have about life insurance beneficiaries, and we’ll cover the seven most common mistakes people make when naming life insurance beneficiaries—and how you can avoid them.

Let’s begin with the three key parties to a life insurance policy:

  1. The person whose life is insured. This person is called the insured.
  2. The entity that provides the insurance coverage and pays the death benefit when the insured dies. This entity is an insurance company.
  3. The person or other entity the company pays the money to when the insured dies. This is the beneficiary.

Life Insurance Primary Beneficiary Definition in a Nutshell

A life insurance beneficiary—the entity who benefits when the death benefit is paid—could be a relative of the insured, a trust, a charity, a business partner—or it could be anyone else who might suffer financially when the insured dies.

A life insurance beneficiary doesn’t have to be a person. It could also be a partnership, a corporation, or an estate.

Answers to Four Common Questions About Life Insurance Beneficiaries

#1: What if I didn’t name a beneficiary when I bought my life insurance policy—or what if my life insurance beneficiary dies before I do?

If you pass away and your policy doesn’t name a living and qualified life insurance beneficiary (see below), then your estate—which includes everything from your socks to your stocks—will receive the death benefit.

But that’s not a good thing! Your death benefit—which could be hundreds of thousands of dollars—is now subject to probate, and probate costs are based in part on the value of the estate. That’s going to cost your loved ones plenty. And it will likely lead to a long delay in their receiving the money. If you had named living beneficiaries to receive the death benefit, that death benefit would not be part of your estate.

There’s another problem if you don’t have a living beneficiary for your life insurance policy: A death benefit that is paid to a beneficiary (other than to your estate) can’t be seized by those you owed money to before you died. Those companies and individuals can only make a claim against your estate. But if your estate now contains your life insurance death benefit, well, some of your insurance payout may be going to the credit card company, the property tax collector, the auto loan company … you get the idea.

So you really, really want to have at least one living, breathing beneficiary specified in your life insurance policy.

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#2: Can I add a life insurance policy beneficiary if I don’t have one or if the person I originally named is deceased? And can I change my beneficiary?

Yes and yes. At no charge. All you have to do is write your wishes on a piece of paper, sign it, and mail it to the insurance company. (Be sure to include your name and policy number. If you don’t know your policy number, call the company—or contact your insurance agent—to get it.) You can change beneficiaries as often as you want.

#3: Can I have more than one primary life insurance beneficiary?

Absolutely. But you do need to tell the insurance company what percentage (not dollar amount) of the death benefit each beneficiary is to receive.

Why not just say how many dollars each beneficiary gets? Because with many policies, particularly the life insurance policies recommended by Bank On Yourself Authorized Advisors, the death benefit can grow over time. Use percentages, so there’s no question.

Typical beneficiaries might include your spouse, your children (be careful if they’re minors; see below), a trust, your favorite charity, perhaps even your business partner. Business partners often insure one another so that if either one dies, there’s money for the remaining partner to assume full ownership of the enterprise.

#4: Can I designate somebody to become my life insurance beneficiary if my primary beneficiary passes away before I have a chance to replace them?

Yes! That somebody is called a contingent beneficiary. Contingent life insurance beneficiaries are discussed in this article from our Bank On Yourself No-Nonsense Guide to Life Insurance.

And you really should name a contingent beneficiary for your life insurance policy.

Of course you may want all the money to go to your spouse, who will then use it to take care of the children, replace your income, and so forth. But do you and your spouse ever travel together? Even to the grocery store?

If the unthinkable were to happen and both of you were to die in the same accident, you would want a contingent beneficiary to be in place to receive the death benefit and provide for your children’s well-being.

Primary Versus Contingent Life Insurance Beneficiaries

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You need to understand how these two types of beneficiaries relate to each other. It’s not like you should name your favorite child as your primary beneficiary and your other children as contingent beneficiaries.

Why? Because your first child will get the whole enchilada, and your other kids will get nada—unless your favorite dies first.

You see, contingent beneficiaries come into play only if there are no living primary beneficiaries. Contingent life insurance beneficiaries are your “Plan B” beneficiaries, your “What If?” beneficiaries.

Choose your primary beneficiaries first. Then ask yourself, “What if for some unthinkable reason all my primary beneficiaries die before me—or at about the same time I die?” Think auto accident, hot air balloon malfunction, whatever.

Who should my death benefit go to then?

The answer to that question is who you should name as your contingent beneficiaries.

What if you can’t think of a contingent beneficiary? Well, try real hard.

Maybe this scenario fits you: Your death benefit won’t be huge, so there’s not enough money involved to remember your favorite charity and your spouse and your kiddos as your primary beneficiaries. But if your family isn’t around to get the money, what then?

Maybe that’s the time to remember the charity you couldn’t afford to name as a primary beneficiary.

So you say, “If my wife and kids are around, the whole death benefit goes to support my family. But if they’re all gone, shucks, give the money to the Save the Hedgehog Foundation” … or whatever.

In this scenario, then, your family members are your primary beneficiaries, and the charity is the contingent beneficiary.

Don’t Make These Seven Mistakes When You’re Naming Your Life Insurance Beneficiaries

There are mistakes you should avoid when naming your primary and contingent life insurance beneficiaries. A qualified life insurance advisor, such as a Bank On Yourself Authorized Advisor can be of great help.

Mistake #1: Naming a minor child as your life insurance primary or contingent beneficiary

Do not name a minor child as your life insurance primary beneficiary—or even as a contingent beneficiary. Children under legal age cannot receive funds—in any state. A competent attorney can prepare a simple life insurance trust to receive the money. You’ll need to name the person (or persons) who will serve as trustee and administer the trust after you pass away.

This trustee will likely be the person you choose to be the legal guardian of your minor children. So don’t take this lightly. Have a heart-to-heart with your prospective trustee. Be sure he or she is up to the task and is willing to take on the responsibility.

Mistake #2: Automatically thinking a special needs child should be a life insurance beneficiary

Speaking of children, if you have a child with special needs, particularly needs that may last the life of the child, think twice before naming this child as a beneficiary of your life insurance policy.

Why? Because under federal law, anyone—minor or adult—who receives a gift or inheritance of more than $2,000 is not eligible to receive Supplemental Security Income and Medicaid until they have used the windfall for only approved expenditures, down to the state-specified asset limit (typically $2,000).

What should you do? Get with an estate planning attorney, who will help you set up a special needs trust. Then, like a life insurance trust for a minor child, tell your insurance company you want the trust—using its legal name—to be the beneficiary. And appoint a trustee to manage the money.

Mistake #3: Not using the legal name of a charity named as your life insurance beneficiary

If you want to name a charity as your life insurance primary beneficiary or contingent beneficiary, be sure to use the proper name of the charity, as it’s registered with the state. Your local animal shelter may do business as Loving Homes for Lost Hounds, but it might be registered as Central City Humane Society, Inc. To be sure, contact the charity.

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Mistake #4: Thinking your will trumps your life insurance beneficiary designations

Do not make the assumption that your will is going to take priority, if it’s in conflict with your insurance policy beneficiary designations. Your will does not supersede your life insurance policy.

Your life insurance company will pay the beneficiaries you specified (or your estate if you don’t have a beneficiary—see above), regardless of what you’ve said in your will, even if your will is more recent.

Mistake #5: Not considering the effects of huge windfalls on younger life insurance beneficiaries

Do not encourage your children, even young-adult children, to become irresponsible by letting them receive a humongous life insurance death benefit all at once. No matter how mature and sensible your beloved children are now, after you’re gone, with all that money burning a hole in their checkbook, things are likely to change.

Talk with an attorney now about setting up a trust to dole out the money over time. (These provisions can be part of the same life insurance trust or special needs trust we talked about earlier.)

You can make exceptions in your trust for bona fide educational expenses or health and welfare needs, but your trustee will only turn the tap under the conditions you specify.

Mistake #6: Forgetting to have your spouse approve your primary life insurance beneficiary in community property states

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Don’t stiff your sweetie. Sure, you can specify almost anyone you have a relationship with as your beneficiary … even your secret special someone.

But in community property states, your spouse needs to sign off on the arrangement if he or she isn’t going to be the sole beneficiary, because in community property states, that death benefit is already considered community property.

Think twice about passing over your spouse as your life insurance primary beneficiary if you live in any of these states, unless, of course, your spouse agrees with your plan:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

The Most Common Mistake of All When It Comes to Life Insurance Primary and Contingent Beneficiaries

We’ve saved the worst for last. The most common mistake is …

Mistake #7: Thinking that when it comes to selecting life insurance beneficiaries you can simply set it and forget it

Don’t do that!

Keep your life insurance beneficiary designations up to date! Review them once a year, perhaps on your birthday. But don’t stop there. Pull out your life insurance file and look at your primary beneficiary and contingent beneficiary list when any material change occurs in your life. Have you gotten married for the first time? Did you change business partners? Have you divorced? Remarried? Are your kids now of legal age? (You may want to update that trust.)

We’ve included a real-life horror story of what can go wrong in our article on contingent beneficiaries.

Working with a Bank On Yourself Authorized Advisor will help. He or she will remain in touch with you and at least annually (twice a year is better) will ask you about your beneficiaries and any life changes. It’s a free service. Why not take advantage of it?


How Will My Life Insurance Company Know When I Die?

Life insurance companies don’t read the obituaries every day. They depend on life insurance policy beneficiaries to notify them of the death of an insured person.

And your beneficiaries won’t know to do that unless they know they’re your beneficiaries! So tell your primary beneficiaries—and your contingent beneficiaries, too— that you have a life insurance policy, and they’re named in it.

They will love you for this.

Also tell them where your copy of the policy is kept in your home, so they can find it if needed. To help minimize problems, give them a letter listing (1) the name of the insurance company, (2) its toll-free “policy claims department” telephone number, (3) your name, as it appears as the insured, (4) the policy number, and (5) where you keep the policy (“In the third drawer of the filing cabinet in the den, filed under Life Insurance”).

Then, because they are going to lose this letter, remind them every year on your birthday that they’re your life insurance beneficiary, and give them a copy of the letter.

Do these things, and you will have avoided the biggest traps. You can be confident that your desires will be carried out with regard to your life insurance death benefit when you pass away, and that those you intended to get the money will get the money.

Continue to the Table of Contents for the No-Nonsense Life Insurance Guide