Choosing your life insurance beneficiaries might seem straightforward, but this decision requires careful thought. Your beneficiary designation determines who receives your death benefit, and mistakes can lead to unintended consequences, family disputes, or tax complications.
Let us explore everything you need to know about naming beneficiaries wisely.
What Is a Beneficiary?
A beneficiary is the person or entity you designate to receive your life insurance death benefit when you pass away. You can name one or multiple beneficiaries, and you can specify what percentage each receives.
Primary vs. Contingent Beneficiaries
Primary beneficiary: The first in line to receive the death benefit.
Contingent (secondary) beneficiary: Receives the death benefit if the primary beneficiary has passed away or cannot be located.
Example:
- Primary: Spouse (100%)
- Contingent: Two children (50% each)
Common Beneficiary Options
1. Your Spouse
Most married people name their spouse as primary beneficiary. Benefits:
- Provides immediate financial support
- Tax-free transfer between spouses
- Spouse can make decisions about how to use funds
Important: In some states, you must name your spouse as beneficiary or get written consent to name someone else.
2. Your Children
Common as contingent beneficiaries or primary if you are single. Considerations:
- Minor children cannot directly receive life insurance proceeds
- Funds will be held in court-supervised trust until age 18 or 21
- Consider naming a trust or guardian to manage funds
3. A Trust
Naming a trust as beneficiary provides more control:
- Specify how and when beneficiaries receive funds
- Protect assets from creditors or divorce
- Manage funds for minor children
- Reduce estate taxes for large estates
4. Your Estate
Generally not recommended because:
- Proceeds become part of probate (public, time-consuming, expensive)
- Creditors can make claims against the funds
- May be subject to estate taxes
Only name your estate if: You have no living relatives or want the court to distribute assets according to state law.
5. Charitable Organizations
You can name a charity as beneficiary:
- Full percentage or partial split with family members
- Estate may receive tax deduction
- Creates a lasting legacy
How to Split Benefits Among Multiple Beneficiaries
When naming multiple beneficiaries, specify the percentage each receives. Common arrangements:
Equal Split
- Three children: 33.33% each
- Two siblings: 50% each
Unequal Split (Based on Need)
- Child with disability: 60%
- Two other children: 20% each
Per Stirpes vs. Per Capita
Per stirpes (by branch): If a beneficiary dies, their share goes to their children.
Per capita (by head): If a beneficiary dies, their share is split among remaining living beneficiaries.
Special Situations
Naming Minor Children
Do not name minor children directly. Instead:
- Option 1: Create a trust and name the trust as beneficiary
- Option 2: Use your state Uniform Transfers to Minors Act (UTMA) to name a custodian
- Option 3: Ensure your will names a guardian who will manage the funds
Blended Families
Get specialized advice for complex beneficiary situations. Blended families require extra care.
Homeowners with Mortgages
If your primary concern is ensuring your family keeps the home, consider Mortgage Protection Insurance. With MPI, coverage is designed around your mortgage amount, providing targeted protection. Many families layer protection: MPI for mortgage coverage (available from specialists like MoProInsure.com who sell ONLY mortgage protection insurance) plus Term Life for additional needs (available from general life insurance agents).
Get specialized advice for complex beneficiary situations. Blended families require extra care:
- Discuss beneficiary decisions with spouse and children
- Consider separate policies for different beneficiaries
- Use a trust to ensure fair distribution
- Review beneficiaries after major life events
Special Needs Dependents
If a beneficiary receives government benefits, a direct payout could disqualify them. Instead:
- Create a special needs trust
- Name the trust as beneficiary
- Trust provides supplemental support without affecting benefits
Ex-Spouses
In most states, divorce automatically revokes your ex-spouse as beneficiary. However:
- Some states do not have this protection
- Divorce decrees may require you to maintain coverage for an ex-spouse (child support arrangements)
- Always update beneficiaries immediately after divorce
Common Beneficiary Mistakes
1. Forgetting to Update After Major Life Changes
Always review beneficiaries when you:
- Get married or divorced
- Have or adopt children
- Experience death of a beneficiary
- Have significant changes in relationships
2. Naming Only One Beneficiary
Always name contingent beneficiaries in case your primary beneficiary:
- Passes away before you
- Cannot be located
- Disclaims the benefit
3. Being Too Vague
Avoid vague designations like my children or my heirs. Instead:
- Use full legal names
- Include dates of birth or Social Security numbers
- Specify exact percentages
4. Not Coordinating with Estate Plan
Your beneficiary designations override your will. Make sure they align with your overall estate plan.
5. Naming a Minor Without a Trust
This creates delays and court supervision. Always use a trust or custodial account for minor beneficiaries.
How to Update Your Beneficiaries
Updating beneficiaries is simple:
- Contact your insurance company or agent
- Request a change of beneficiary form
- Complete the form with full legal names and percentages
- Sign and date the form
- Keep a copy for your records
Most companies also allow online beneficiary updates through customer portals.
Tax Considerations
Life insurance death benefits are generally income tax-free to beneficiaries. However:
- Estate taxes: Large estates (over $13.61 million in 2025) may owe federal estate tax
- Income taxes on interest: If the payout is delayed, interest earned is taxable
- Creditor claims: If estate is the beneficiary, creditors can make claims
Related Resources
Getting Expert Guidance
Choosing beneficiaries involves both insurance and estate planning considerations. For complex situations, consult both an insurance professional and an estate attorney.
MoProInsure.com offers free consultations with licensed specialists who can help you understand beneficiary options and ensure your life insurance protection aligns with your family goals.
Remember: Your beneficiary designation is one of the most important decisions you will make with your life insurance policy. Take the time to choose wisely and review regularly.