What is a beneficiary and how do you choose one?

What is a primary beneficiary?

The primary beneficiary is the person or entity designated to receive the death benefit or other benefits from an individual’s estate. Primary beneficiaries are named on the insurance policy or identified in a will or trust. If you’re married or in a domestic partnership, it’s common to name your spouse or partner as your primary beneficiary.

What is a contingent beneficiary?

A contingent beneficiary is the person or entity that is next in line to receive benefits from a policy if the primary beneficiary is no longer alive or can’t be found at the time benefits are being paid out. If you have a spouse and children, most policyholders will name their children as contingent beneficiaries in case their spouse dies before them.

Frequently asked questions about beneficiaries

Now that you know the two main types of beneficiaries, it’s helpful to know the answers to these common questions before naming yours.

What is a secondary beneficiary?

A secondary beneficiary is another name for a contingent beneficiary. Like the name suggests, the secondary beneficiary would be second in line to inherit any benefits if the primary beneficiary isn’t available.

What happens if a beneficiary is a minor?

Although minors can be named as beneficiaries, it’s best practice to avoid doing so. Instead, you can name a capable and trusted adult guardian to supervise the minor’s benefits. They will handle the minor’s finances until they come of age to do it themselves.

Another way to control a minor’s inheritance is to use a living trust. Through a living trust, a designated third party or trustee will manage your estate according to any guidelines you’ve outlined for a minor beneficiary. This means you can specify how and when the minor will receive their benefits.

How many beneficiaries can I have?

You’re allowed to name multiple primary and contingent beneficiaries. If you do name multiple individuals or entities, you’ll have to specify what percentage of the benefits each one will receive and your allocation must total 100% of your benefit. Check with your life insurance company to see if your policy limits the number of beneficiaries you’re allowed to name.

Are there restrictions for choosing a beneficiary?

Virtually anyone can be named to receive benefits from your estate after you die, but it’s important to be aware that certain states and insurance companies have some restrictions. For example, if you’re married, your primary beneficiary may automatically be your spouse unless you designate otherwise. Check with your insurer about their restrictions or verify that your state doesn’t have community property laws.

Community property states consider those in marriages to have equal ownership of property and assets. In a community property state, your spouse will have to give written permission if you wish to name a beneficiary that isn’t them.^[1] Currently, the following nine states abide by these laws:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

What is a beneficiary identification code?

Beneficiary identification codes are not at all related to estate planning or life insurance. They’re actually codes used by the Social Security Administration to describe what relationship a person has to the primary person receiving Social Security benefits.^[2]

Example scenarios of possible beneficiaries

Because you can specify different types and numbers of beneficiaries, it may be confusing to conceptualize how to handle your preferred allocations. Here are some examples to help you visualize the possibilities.

Beneficiary example for someone with a spouse and kids:

• Primary beneficiary: Spouse or partner
• Contingent beneficiary: One or multiple kids

Beneficiary example for someone with no spouse or kids:

• Primary beneficiary: Parent or other relative
• Contingent beneficiary: Sibling or other relative

Multiple beneficiaries example allocation:

• Primary beneficiaries: Spouse (40%), Adult child (30%), Adult child (30%)
• Contingent beneficiary: Close relative (50%), Charity 1 (25%), Charity 2 (25%)

If you named multiple primary beneficiaries and one were to die before receiving their benefit, the other primary beneficiaries would split the benefit equally. In the above example, if your spouse died before receiving the benefit, each adult child would receive 50% of the payout. Additionally, all primary beneficiaries would either have to be unavailable or decline the benefit for the contingent beneficiaries to receive it.

Tips for choosing a beneficiary

As previously mentioned, you can choose virtually whomever you want as your beneficiary. Although many people choose family members as beneficiaries, depending on your circumstances or goals, this doesn’t have to be the case. Whomever you decide on, think through it with care and make sure you’re comfortable and confident in your decision.

Ask important questions

When choosing a beneficiary, it’s important to ask yourself some critical questions. Think about your answers to the questions below and let them guide your decision.

• Are you married?
• Do you have any children?
• Who depends on you financially? (E.g., an aging parent or other relative)

Consider all your options

Naming a beneficiary is a highly personal decision, so don’t feel obligated or pressured to name anyone you aren’t certain about. Remember to take all of your options into consideration.

If you have a complicated relationship with your immediate family, feel free to name other relatives, godchildren, friends or anyone else you deem worthy of inheriting your assets. If you wish to do this, remember to check that your insurer or home state doesn’t have restrictions on whom you can name. Additionally, if you’re passionate about a cause, you can designate a charity or organization to benefit from your estate as well.

Plan for a backup

When designating a beneficiary, it’s wise to think through all scenarios. You want to plan for multiple outcomes to ensure that the people you love are cared for after you’re gone or the right organizations receive your support. It’s best practice to name both a primary and contingent beneficiary, just in case the primary beneficiary can’t be contacted, refuses the benefits or dies before you.

Remember that you can change your choice

It’s important to remember that after you’ve named a beneficiary, you’re allowed to make changes as you see fit. This is useful if your marital status changes, you become a parent or you simply change your mind.

Contact your insurance company to request a change of beneficiary form. Fill out the form accurately with the correct name and information of the people or organizations you’re designating. Additionally, remember to keep your choices up-to-date and revise who gets what percentage of the benefit if you name multiples.

How to write a beneficiary letter

Deciding on beneficiaries for your life insurance policy is just one aspect of planning for your estate. Once you’ve chosen your beneficiaries, the next step is to provide them with guidance and instruction for dealing with your estate after you’re gone. A beneficiary letter or letter of instruction provides the necessary information your heirs will need to locate, divide and use your estate. Keep in mind that unlike anything specified in a will, none of the instructions in the letter are legally binding. Use these tips to help you write a beneficiary letter that will be useful to your loved ones.

List important contact information

One of the most important pieces of information to leave your beneficiaries with is the contact information of relevant insurance agents, financial institutions, trustees, brokers, attorneys or accountants. Note the phone numbers, addresses and names of anyone who will be involved in the process of distributing your estate so that your beneficiaries can reach them easily.

Give specific and clear instructions

If your beneficiaries are receiving property, it’s helpful for you to give instructions on how to retrieve it. For example, if you leave an adult child your car, you should specify where the car and title are located and how to access both the location and vehicle (e.g., garage code, location of the keys). It’s helpful to go through the process in your head to make sure you’re not leaving out important information or steps.

Additionally, listing out your assets and mentioning the estimated value of any property is useful information to provide in the letter. You can also provide instructions for how to distribute items of lesser value such as personal effects and heirlooms. Your guidance in these matters will be helpful during a very difficult grieving period for your friends and family.

Address your beneficiary personally

Beneficiaries are generally individuals who mean a great deal to you personally. Whether they’re friends or family, remember to write as if you are speaking to them. Tell them anything you wish for them to do and remember to express any love or appreciation you may have for them. This may be the last they will hear from you, so write from the heart.

Keep multiple copies

Another tip is to keep multiple copies of your beneficiary letter. Have a personal copy for you, one for the executor of your will and one for an attorney. Ideally, your personal copy should be easily accessible for your family and friends so that they don’t have trouble finding it when it’s needed.

Check the letter annually and update as needed

Having this letter written and ready to go is one part of the process, but know that you should also revisit it annually and update it to account for any lost or new assets or possessions. This will make it so that if anything should happen unexpectedly, there are clear instructions for what to do with your current estate

Additional resources

Although this guide covers many common questions about beneficiaries, you may want to dig into these additional estate planning and insurance resources as you go through the process. If you’ve been named a beneficiary, don’t forget to check out our printable beneficiary to-do list to help you accomplish everything your loved one requested in their letter of instruction.

For policyholders:

• Updating beneficiary designations: Why it's so important ^[3]
• Finding an Attorney to Help with Estate Planning ^[4]
• Life Insurance Guide
• Estate Planning Forms for All 50 States ^[5]

For beneficiaries:

• Life Insurance Policy Locator (find unclaimed policies you may be a beneficiary of) ^[6]
• What to Know About Life Insurance Beneficiaries ^[7]

Choosing a beneficiary for your life insurance policy is an integral part of planning for your estate and taking care of your loved ones after you’re gone. Now that you know what a beneficiary is, you can use these tips to make a decision that you’re confident about. Your family and friends will be grateful for your careful planning, and you can go through life with peace of mind about the future.