What is Beneficiary Insurance?

Beneficiary insurance, such as life insurance, requires you to name another person as a beneficiary. In general, insurance types such as homeowners and automobile are automatically paid only to the insured. In life insurance, this is not the case.

Significance

Beneficiary insurance, such as life insurance, provides financial benefits to a person other than the insured in the event of the insured's death. Often, these financial benefits will help the beneficiary maintain her lifestyle.

Types

Beneficiary insurance purchased as life insurance can be comprised of whole life insurance, which intends to provide insurance benefits for an entire life and accrues cash values, or term insurance, which intends to provide life insurance benefits for a limited number of years and has no cash value.

Function

Beneficiaries can use the insurance benefits they receive in any way they see fit. They can pay off bills, buy a new home or spend it all on clothes--unless the beneficiary is a trust, in which case the trustee decides who gets what amount.

Considerations

Life insurance policy owners must name both primary and contingent beneficiaries. This allows the death benefit to flow through to another person in the event of the primary beneficiary's death.

Size

The size of the benefit given to the beneficiaries will depend on the size of the death benefit. If the policy is called a graded death benefit, there may be no death benefit for the first two years.