The owner of a life insurance policy selects beneficiaries to receive funds at the time of the insured’s death. A policy owner generally identifies two levels of beneficiaries when entering into an insurance contract: primary and contingent. How the owner identifies the policy’s beneficiaries determines how an insurer will disburse benefits when the insured dies and whether the owner retains the right to change his beneficiary designations in the future.
Primary Beneficiaries vs. Contingent Beneficiaries
A primary beneficiary receives funds when an insured dies before any other party. If a policy includes multiple primary beneficiaries, an insurer pays each beneficiary his appropriate share of the policy’s benefit amount. A contingent beneficiary receives proceeds when the person named as a policy’s primary beneficiary dies before the insured. Potential beneficiaries include a person’s relatives, friends, partners, charities and trusts. A policy owner may include as many primary and contingent beneficiaries in a contract as he desires.
Revocable vs. Irrevocable
If a beneficiary is revocable, a policyholder retains his right to remove the beneficiary from the policy or adjust the amount the beneficiary will receive when the insured expires without consulting the named beneficiary. If a policy identifies a beneficiary as irrevocable, an owner must secure written permission from the beneficiary before removing him from the policy or adjusting his benefit amount.
The National Association of Insurance Commissioners provides advice for policyholders regarding the naming of beneficiaries on its website. The NAIC recommends a policyholder identify a beneficiary by name rather than reference. Citing “Jane Doe” rather than “wife” as a beneficiary, for instance, ensures that Jane Doe will receive a benefit even if the policyholder enters into a subsequent marriage.
If a policyholder lists a class of beneficiaries, such as his children, the NAIC recommends he include either the term “per stirpes” or “per capita” when doing so. Including the term per stirpes ensures that a deceased beneficiary’s family members will receive the beneficiary’s benefit in his absence. Incorporating the term per capita means that if one of the beneficiaries in a class dies before the insured expires, the remaining members of the class will receive the deceased’s share when the insured dies.
Term vs. Cash Value Policies
A term life insurance policy pays a predetermined amount if an insured dies within a certain number of years identified in the contract. Comparatively, cash value policies, including whole life, universal life and variable universal life, may pay more than a contract’s face amount depending on the performance of the investment account contained within each. For that reason, the NAIC further recommends that a policyholder designate a percentage of the policy’s benefit to each of its beneficiaries rather than a specific dollar amount.