Beneficiary designation rules

Who gets paid, and in what order

The beneficiary is the person or entity named to receive a life insurance policy's death proceeds. The policyowner names the beneficiary, not the insured (unless they are the same person). A beneficiary does not need an insurable interest in the insured when the insured buys coverage on their own life. Insurable interest is tested at application, between the applicant and the insured.

Beneficiaries are designated by level:

• Primary beneficiary: first in line. If one or more primaries are alive when the insured dies, they share the proceeds and nobody below them receives anything.
• Contingent (secondary) beneficiary: paid only if every primary has died before the insured.
• Tertiary beneficiary: paid only if every primary and every contingent has died first.

If no named beneficiary survives, or none was ever named, the proceeds are normally paid to the insured's estate. That exposes them to probate delay, to the estate's creditors and to estate administration costs, which is why naming a contingent matters.

Revocable versus irrevocable

A revocable designation can be changed by the policyowner at any time without the beneficiary's knowledge or consent. The beneficiary has only an expectation, not a vested right. Most designations are revocable.

An irrevocable designation gives the beneficiary a vested interest. Without the irrevocable beneficiary's written consent, the policyowner cannot change the beneficiary, surrender the policy, take a policy loan, or assign the policy. The irrevocable beneficiary's rights usually end if that beneficiary dies before the insured, and control then returns to the owner.

How the designation is written

• Specific designation: individuals named by name, such as "Maria Lopez, sister."
• Class designation: a group, such as "my children." It automatically includes children born or adopted later, but it can be ambiguous and invite dispute.
• Per capita ("by the head"): proceeds are split equally among the named beneficiaries who are still living. A deceased beneficiary's share goes to the survivors, not to that beneficiary's children.
• Per stirpes ("by the branch"): a deceased beneficiary's share passes down to that beneficiary's descendants.

Special beneficiaries

• Minors cannot receive proceeds directly. Without planning, a court may have to appoint a guardian of the property. Naming a trust, or a custodian under a uniform transfers to minors act, avoids this.
• Trusts let a trustee manage proceeds under terms the owner set.
• The estate can be named deliberately, with the drawbacks noted above.
• Charities and businesses can also be named.

Simultaneous death and the common disaster clause

If the insured and the primary beneficiary die in the same accident and the order of death cannot be determined, the Uniform Simultaneous Death Act presumes the insured survived the beneficiary. Proceeds then go to the contingent, or to the insured's estate. A common disaster clause (or time clause) goes further. It requires the beneficiary to outlive the insured by a stated period, such as 14 or 30 days, to collect. This keeps proceeds from passing through the primary beneficiary's estate when the beneficiary dies shortly after the insured.

Changing the beneficiary

The owner changes a revocable beneficiary by written request to the insurer in the form the policy requires. Under the recording method used by most insurers today, the change takes effect when the insurer records the written request. A will cannot override the beneficiary designation on the policy. The contract controls who is paid.