Life Insurance Beneficiary: What It Is and How It Works?

last updated 3 January 2025

Have you designated a life insurance beneficiary? Providing for loved ones upon your death remains a priority for many people. That’s why it’s important to choose beneficiaries. Failure to do so could tie up death benefits in probate court, and court costs could reduce how much your loved ones receive.

What is a life insurance beneficiary?

A life insurance beneficiary is the person or entity you name to receive the death benefit from the policy. Beneficiaries could be one or more persons, the trustee of a trust you establish, a charity or your estate. If you do not name a beneficiary, the death benefit automatically is paid to your estate.

There are two types of life insurance beneficiaries: primary and contingent. The primary beneficiary is the person or entity named in the policy to receive the death benefits. The contingent beneficiary receives the death benefit in the event the primary beneficiary cannot be found.

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How does a life insurance beneficiary work?

When a person purchases a life insurance policy, he or she chooses a person, persons or entity to receive the death benefits upon the policyholder’s death. This could be the person’s spouse and/or children, other loved ones, or even a charity. When the policyholder dies, the beneficiaries file a claim to receive their portion of the death benefits.

What are the rules for the beneficiary?

While choosing life insurance beneficiaries is up to the policyholder, there are some basic guidelines to follow to ensure your wishes are carried out.

1. You don’t have to name beneficiaries.

Life insurance beneficiaries are not required, but not naming beneficiaries could make it more difficult and time-consuming for your heirs to receive the death benefits of the policy. Even if you state beneficiaries in your will, it’s important to name them on the insurance policy as well.

2. You can name as many beneficiaries as you want.

This means you can name your spouse or partner, your children and other loved ones to receive the death benefits of the life insurance policy.

3. Your state may require you to name your spouse as a beneficiary.

If you live in a community property state, check your state’s requirements regarding life insurance benefits. Your spouse may be entitled to a specific portion of the death benefits of any life insurance policy.

4. Changes to life insurance beneficiaries must be done by you.

It’s important to keep your life insurance beneficiaries up to date. If there’s a major life change such as a divorce or death, you are responsible for updating your beneficiaries to reflect these changes. Otherwise, your death benefits may go to someone you don’t want to have them. Making changes to your will does not automatically carry over to your life insurance benefits.

Does the beneficiary get all the life insurance money?

In most cases, beneficiaries will receive the full amount of the life insurance death benefits. In some cases, they will have to pay estate taxes on the life insurance payout if the policyholder’s estate, including the life insurance payout, is worth more than a set amount. According to the Internal Revenue Service, that amount for 2024 is $13.6 million. As such, many beneficiaries will not have to pay estate taxes on a life insurance payout.

If beneficiaries choose an interest-based payout instead of a lump sum, they would have to pay taxes on the interest.

Who should be your life insurance beneficiary?

When selecting your life insurance beneficiary, think about who you want to provide for after your death. For many people, this is a spouse, children, grandchildren or other loved ones. However, it could be another person or persons you hold dear.

Can a minor be your life insurance beneficiary?

Yes, minors can be your life insurance beneficiaries. However, they must be 18 or 21 (depending on your state) to receive the death benefits. Therefore, it’s important to either name the minor’s caregiver as the beneficiary or set up a trust for the minor and name the trust as the beneficiary. With a trust, you will need to choose a trustee to manage the funds for the minor until he or she reaches 18 or 21 years of age.

Bottom line

Choosing the right life insurance beneficiaries is essential to ensuring your loved ones are financially supported after your passing. Regularly reviewing and updating your beneficiary designations—especially after significant life changes like marriage, divorce, the birth of a child, or the loss of a loved one—helps keep your policy aligned with your current wishes.

By keeping your policy up to date, you can ensure the death benefit is distributed as intended, minimizing the risk of complications or disputes during an already difficult time.

Karon writes about personal finance, including consumer credit, credit cards, mortgages, student loans and retirement, along with travel, small business and health care. Her work has appeared in U.S. News & World Report, LendingTree, USA Today’s 10Best, GoodRx and many others. Karon earned her B.S. In journalism with an emphasis on news editorial from the University of Southern Mississippi. A member of the American Society of Journalists & Authors, Karon released her first book, “100 Things to Do in the North Georgia Mountains Before You Die” (Reedy Press), in 2022.