Beneficiary designation rules

Who gets the money, and who decides

A life insurance policy pays a death benefit to whoever the policyowner has named as beneficiary. That single sentence carries two rules that the exam returns to again and again: the owner names the beneficiary (not the insured, if they are different people), and the owner may reserve the right to change that choice after the policy is issued. Florida's industrial life statute states the idea plainly -- the policy must provide a space for the beneficiary's name "with a reservation of the right to designate or change the beneficiary after the issuance of the policy" (Fla. Stat. s. 627.512).

A diagram in two parts. On the left, four boxes stacked top to bottom show the order in which a death benefit is paid: primary beneficiary at the top, then contingent beneficiary, then an optional tertiary beneficiary, and at the bottom the insured's estate, labeled probate, creditors, delay. Arrows between the boxes are marked 'if none survives', showing that each lower level is reached only when nobody on the level above is alive. On the right, a fork asks whether the owner can change the designation. One branch is revocable, the default, where the owner changes the beneficiary at will, no consent is needed, and the beneficiary holds only an expectancy. The other branch is irrevocable, where the beneficiary has a vested right and must give written consent before the owner can change the beneficiary, assign the policy, borrow against it, or surrender it. A note beneath contrasts per capita and per stirpes for a class of three children where one has died leaving two children: per capita gives each of the two survivors one half and the grandchildren nothing; per stirpes gives each survivor one third and lets the grandchildren split the remaining third. A final line reminds that a beneficiary is changed by written notice to the insurer, not by a will. — Order of payment, revocable versus irrevocable, and per capita versus per stirpes.

Levels of designation

Beneficiaries are named in order of succession. Proceeds flow to the first level that has a living (or existing) member; nothing is paid to a lower level unless every member of the level above it has predeceased the insured.

Primary beneficiary -- first in line. There may be more than one, sharing in the

percentages the owner sets.

Contingent (secondary) beneficiary -- receives the proceeds only if no primary

beneficiary survives the insured.

Tertiary beneficiary -- a third level, used when the owner wants a further fallback.

If no named beneficiary at any level survives, the proceeds are paid to the insured's estate. That outcome is usually the one the owner least wants: money paid to an estate passes through probate, is exposed to the deceased's creditors, and loses the privacy and speed that a named beneficiary provides. Naming a contingent beneficiary is the standard way to avoid it.

Revocable versus irrevocable

A revocable designation is the default. The owner can change it at any time, without the beneficiary's knowledge or consent, and the beneficiary has no vested right in the policy while the insured is alive -- only an expectancy. Florida's required credit life provision captures the general rule: the beneficiary's consent "is not required for this or any other change in the policy, unless the designation of the beneficiary is irrevocable" (Fla. Stat. s. 627.617).

An irrevocable designation gives the beneficiary a vested interest. Once made, the owner cannot change the beneficiary, assign the policy, take a policy loan, or surrender it for cash without that beneficiary's written consent. Irrevocable designations are common in divorce settlements and in collateral arrangements, where the beneficiary needs assurance that the coverage cannot be undone behind their back.

Specific, class, and other designations

Specific (named) beneficiaries are identified by name and relationship -- "Maria

Lopez, spouse." This is the clearest form and the one producers should encourage.

Class designations name a group -- "my children." The class is determined at the

insured's death, so children born after the policy was written are included and a child who predeceased the insured is not. Class designations are convenient but invite disputes over who belongs to the class, especially with stepchildren or adopted children.

Per capita ("by heads") divides the proceeds equally among the surviving members of

the class. If one of three children has died, the two survivors split the proceeds.

Per stirpes ("by the branch," or by right of representation) sends a deceased

beneficiary's share down to that beneficiary's own descendants. If one of three children has died leaving two children of their own, those grandchildren share their parent's one-third.

Other common designees:

A trust -- proceeds go to the trustee to be managed under the trust's terms. Often

the best answer when the intended beneficiaries are minors.

The estate -- valid, but with the probate and creditor drawbacks described above.
A minor -- a minor can be named but generally cannot give a valid release for the

money, so the insurer will hold the proceeds until a guardian is appointed by a court. Naming a trust or a custodian for the minor avoids that delay.

A business, charity, or creditor -- any person or entity can be named. Florida's

insurable-interest rule applies when the contract is made; the interest "need not exist after the inception date of coverage" (Fla. Stat. s. 627.404(1)). The industrial life statute goes one step further: the insurer may reserve the right to refuse to endorse a proposed beneficiary who does not appear to have an insurable interest in the insured (Fla. Stat. s. 627.512).

Changing the beneficiary

A revocable beneficiary is changed by the owner giving the insurer written notice on the insurer's form. Most policies say the change takes effect as of the date the owner signed the request, once the insurer records it, but the insurer is protected for any payment it makes before the request reaches its home office. The policy may also state that no change is binding on the insurer until endorsed on the policy (Fla. Stat. s. 627.512). Nothing the owner writes in a will substitutes for a change filed with the insurer.

Common disaster and the survivorship clause

If the insured and primary beneficiary die in the same event and the order of death cannot be established, the Uniform Simultaneous Death Act presumes the beneficiary died first, so the proceeds pass to the contingent beneficiary rather than through the primary beneficiary's estate. A common disaster or survivorship (delayed payment) clause extends the same protection to a beneficiary who survives the insured by only a short period -- commonly 14 to 30 days -- by treating any beneficiary who dies within that window as having predeceased the insured.

Protecting the beneficiary's proceeds

A spendthrift clause keeps proceeds that are being paid out under a settlement option beyond the reach of the beneficiary's creditors and prevents the beneficiary from assigning or borrowing against them. A facility of payment provision, typically found in industrial and small-amount policies, lets the insurer pay a limited sum to whoever paid the funeral expenses or appears equitably entitled when no beneficiary is available to receive it.