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A beneficiary is whoever — or whatever — is entitled to receive the policy proceeds when the insured dies. A beneficiary can be an individual, a class of persons (such as "my children"), the insured's own estate, or an entity such as a charity, corporation, foundation, or the trustee of a trust. Trusts are frequently paired with a beneficiary designation to manage proceeds on behalf of a minor or for estate-planning purposes — though naming a trust as beneficiary does not, by itself, remove the proceeds from the insured's taxable estate.
A beneficiary is not required to have an insurable interest in the insured, and a policyowner is not required to name a beneficiary at all for the policy to remain valid.
The policyowner may name any individual as beneficiary, and may name more than one — in which case each named beneficiary receives whatever percentage of the proceeds the policyowner specifies.
Proceeds designated to a minor are generally paid to the minor's legal guardian, to the trustee of a trust if one has been named as beneficiary, or as a court directs; the guardian and trustee can be the same person. As a general rule, naming a minor directly as beneficiary — rather than through a guardian or trust — is not considered good planning.
Naming a class of beneficiaries — for example, "my children" — can create ambiguity if the insured has been married more than once, has adopted children, or has children born outside of marriage. A more precise class designation, such as "the children born to the marriage of John and Mary Doe," avoids that ambiguity. Many insurers encourage policyowners to name each beneficiary individually and specify the percentage each is to receive, rather than relying on a class designation.
When an insured wants to "group" beneficiaries, two class designations are available: per capita and per stirpes. Per capita — literally "by the head" — divides the proceeds evenly among whichever named beneficiaries are still living. Per stirpes — "by the bloodline" — instead passes a deceased beneficiary's share down to that beneficiary's own heirs.
Elaine purchases a $120,000 life insurance policy and names her three nephews — Marcus, Dominic, and Owen — as equal beneficiaries. Marcus has two children of his own; Dominic and Owen are unmarried with no children. Marcus dies before Elaine. If Elaine's designation was per capita, the $120,000 is divided among the beneficiaries still living: Dominic and Owen would each receive $60,000, and Marcus's children would receive nothing, since they were never named. If Elaine's designation was per stirpes, Dominic and Owen would each still receive $40,000 (their original one-third share), while Marcus's $40,000 share would instead be split evenly between his two children — $20,000 each.
If every named beneficiary has died before the insured, or if no beneficiary was ever named, the proceeds are paid automatically to the insured's estate. Proceeds paid to an estate in this way may become part of the insured's taxable estate.
If no beneficiary is named — or none survives the insured — policy proceeds are paid to the insured's estate.
Trusts are commonly established to hold proceeds for a minor or to fund a scholarship or similar purpose, and can be a useful estate-planning tool for keeping death proceeds out of an insured's taxable estate when structured properly. The tradeoff is that a trust can be relatively expensive to set up and administer.
A beneficiary designation can establish multiple levels of priority. If the primary beneficiary has died before the insured, the next level down — the contingent beneficiary — becomes entitled to the proceeds. Each level of succession is only eligible for payment if every beneficiary in the level(s) above it has died before the insured.
The primary beneficiary has the first claim to the proceeds following the insured's death, and a policyowner may name more than one primary beneficiary and specify how the proceeds are divided among them. The contingent beneficiary — also called the secondary or tertiary beneficiary — has the next claim, but only if the primary beneficiary has died before the insured; a contingent beneficiary receives nothing if the primary beneficiary is still living at the time of the insured's death.
Beneficiary designations are either revocable or irrevocable. A policyowner may change a revocable beneficiary at any time, without that beneficiary's knowledge or consent. An irrevocable beneficiary, on the other hand, cannot be changed without that beneficiary's written consent. Because an irrevocable beneficiary has a vested interest in the policy, the policyowner also cannot borrow against the policy's cash value or assign the policy to someone else without that beneficiary agreeing.
When an insured and the primary beneficiary die at close to the same time in a shared accident, and there is no clear evidence of who died first, most states apply the Uniform Simultaneous Death Law to resolve who is entitled to the proceeds. Under this law, if the insured and primary beneficiary die in the same accident with no sufficient evidence of the order of death, the proceeds are paid out as though the primary beneficiary died first — protecting the policyowner's original intent as well as the interests of the contingent beneficiary.
A common disaster clause added to a policy extends this same logic further: if the insured and the primary beneficiary die in a shared disaster — even if the beneficiary technically survived the insured by a few days — the policy presumes the primary beneficiary died first, so the proceeds pass to the contingent beneficiary (or to the insured's estate if none was named). Insurers typically specify a window, often 14 to 30 days, within which the beneficiary's death must occur for the clause to apply.
A policy owned by Daniel names his husband Peter as primary beneficiary and his daughter Renee as contingent beneficiary, with a common disaster clause in force. Daniel and Peter are in a serious accident together: Daniel dies instantly, but Peter survives for 5 more days before passing away from his injuries. Because the policy included a common disaster clause, the proceeds are still paid to Renee, the contingent beneficiary, exactly as though Peter had died before Daniel.
A common disaster clause protects the contingent beneficiary by presuming the primary beneficiary died first.
A spendthrift clause shields policy proceeds from the claims of a beneficiary's creditors, and also guards against a beneficiary spending down the proceeds too quickly, by requiring that benefits be paid out only in fixed installments over a fixed period, rather than as a lump sum. A beneficiary subject to a spendthrift clause cannot select a different settlement option, and cannot assign or borrow against the remaining proceeds.