Definition

A beneficiary is the person or entity designated to receive the death benefit proceeds when the insured dies.

Types of Beneficiaries

• Natural persons: Individuals (spouse, children, parents, friends)
• Legal entities: Trusts, estates, corporations, charities
• Classes: Groups ("my children," "my heirs")

Multiple Beneficiaries

• Can name multiple: Common to have several beneficiaries
• Specify shares: Indicate percentage or fraction each receives
• Equal shares: If not specified, usually divided equally

Example:

Primary beneficiaries:
- Jane Doe (spouse): 60%
- John Doe Jr. (son): 20%
- Mary Doe (daughter): 20%

Total death benefit: $300,000
Jane receives: $180,000
John receives: $60,000
Mary receives: $60,000

Primary Beneficiary

• First in line: First to receive death benefit
• Priority: If alive at insured's death, receives proceeds
• Multiple primaries: Can have several primary beneficiaries sharing proceeds
• Must predecease: If primary dies before insured, proceeds go to contingent

Contingent Beneficiary

Also called: Secondary or Successor beneficiary

• Backup: Receives benefit only if all primaries predecease insured
• Second in line: "If primary is not alive, then..."
• Multiple contingents: Can name several contingent beneficiaries
• Safety net: Prevents proceeds from going to estate unintentionally

Tertiary Beneficiary

• Third level: Backup to contingent beneficiaries
• Less common: Not always used, but available
• Further protection: Additional layer of beneficiary designation

Distribution Rules

If Primary Alive

• Primaries receive all: Contingents receive nothing
• Per stirpes/per capita: Determines distribution among primaries' heirs if primary deceased

If All Primaries Deceased

• Contingents receive all: Entire death benefit goes to contingent beneficiaries
• Same distribution rules: Apply to contingents

If No Living Beneficiaries

• To estate: Death benefit paid to insured's estate
• Probate: Subject to probate process
• Creditors: May be accessible to creditors
• Taxes: May be subject to estate taxes

Example:

Primary: Spouse (Jane)
Contingent: Two children (John 50%, Mary 50%)
Tertiary: Brother (Tom)

Scenario 1 - Jane alive when insured dies:
Jane receives: 100% ($500,000)
Children receive: Nothing

Scenario 2 - Jane predeceased insured:
John receives: $250,000 (50%)
Mary receives: $250,000 (50%)
Jane's heirs receive: Nothing

Scenario 3 - Jane, John, and Mary all predeceased insured:
Tom receives: 100% ($500,000)

Scenario 4 - All beneficiaries predeceased insured:
Insured's estate receives: $500,000 (subject to probate)

Revocable Beneficiary

Most common type - can be changed without beneficiary's consent.

Characteristics

• Owner control: Policyowner can change or remove beneficiary anytime
• No consent needed: Beneficiary has no say in changes
• No vested rights: Beneficiary has only expectation, not ownership
• Default: Unless specified otherwise, beneficiaries are revocable

Owner Rights with Revocable Beneficiary

Policyowner can:
- Change beneficiaries
- Borrow against policy
- Assign policy as collateral
- Surrender policy for cash
- Change ownership
- Add or remove riders

Irrevocable Beneficiary

Permanent designation - cannot be changed without beneficiary's written consent.

Characteristics

• Vested rights: Beneficiary has ownership interest in policy
• Consent required: Any changes require beneficiary's written approval
• Permanent: Essentially permanent unless beneficiary agrees to change
• Must be explicit: Must explicitly state "irrevocable" in designation

Owner Rights with Irrevocable Beneficiary

Policyowner cannot do following without beneficiary's consent:
- Change or remove beneficiary
- Borrow against policy
- Assign policy
- Surrender policy
- Change ownership
- Change coverage amount

When to Use Irrevocable

• Divorce settlements: Required by court as child support guarantee
• Business agreements: Buy-sell agreements requiring permanence
• Creditor protection: Protect proceeds from policyowner's creditors (in some states)
• Gift tax planning: Remove policy from estate for tax purposes
• Guarantee to beneficiary: Assure someone (ex-spouse, business partner) of benefits

Risks of Irrevocable Designation

• Loss of control: Severely limits policyowner's flexibility
• Cannot adapt: Difficult to respond to life changes
• Consent required: Need beneficiary cooperation for any changes
• Beneficiary's death: If irrevocable beneficiary dies, becomes revocable again

Example:

Divorce decree requires:
- Ex-spouse named irrevocable beneficiary on $200,000 policy
- Until children reach age 21
- Ensures child support if insured dies

Insured wants to:
- Remarry and name new spouse beneficiary: Cannot without ex-spouse consent
- Borrow $50,000 from policy: Cannot without ex-spouse consent
- Surrender policy: Cannot without ex-spouse consent

When children reach age 21:
- Court order fulfilled
- Can request change back to revocable (may need court approval)

These terms determine how death benefits are distributed when a beneficiary predeceases the insured.

Per Stirpes ("By Branch" or "By Roots")

Definition: Deceased beneficiary's share passes to their descendants (children).

How It Works

• By family branch: Each branch of family gets equal share
• Grandchildren inherit: If child predeceased, their children inherit parent's share
• Unequal individual amounts: Grandchildren may receive different amounts based on branch

Example:

Insured names three children as equal beneficiaries (per stirpes):
- Alice: 1/3
- Bob: 1/3  
- Carol: 1/3

Death benefit: $300,000

Scenario: Bob predeceased insured, Bob has 2 children

Distribution:
Alice: $100,000 (1/3)
Carol: $100,000 (1/3)
Bob's branch: $100,000 (1/3 divided among Bob's 2 children)
  - Bob's son: $50,000
  - Bob's daughter: $50,000

Result: Each branch gets $100,000 (equal by branch)

Per Capita ("By Head")

Definition: Share divided equally among surviving beneficiaries of the same class.

How It Works

• By individual: Each living person in class gets equal share
• No inheritance: Deceased beneficiary's share redistributed to survivors
• Equal individual amounts: All living beneficiaries receive same amount

Example:

Same scenario as above (per capita instead):

Insured names three children as equal beneficiaries (per capita):
- Alice: 1/3
- Bob: 1/3
- Carol: 1/3

Death benefit: $300,000

Scenario: Bob predeceased insured, Bob has 2 children

Distribution:
Alice: $150,000 (1/2 of total)
Carol: $150,000 (1/2 of total)
Bob's children: $0 (nothing)

Result: Two survivors split equally

Comparison

How to Change Beneficiaries

Standard Process

1. Complete change form: Obtain beneficiary change form from insurer
2. Specify changes: Clearly identify beneficiaries to add, remove, or modify
3. Sign as owner: Policyowner signs (or legal guardian if minor)
4. Submit to insurer: Send to insurance company's home office
5. Receive confirmation: Insurer sends written confirmation of change

Effective Date

• When signed: Some policies make change effective when signed by owner
• When recorded: Others effective when received/recorded by insurer
• Policy language controls: Check specific policy provisions

Requirements

Who Can Change

• Policyowner: Only owner can change (not insured if different)
• Legal guardian: Can change for minor owner
• Power of attorney: With proper authority

Consent Required

• Irrevocable beneficiaries: Must provide written consent
• Collateral assignment: May need assignee approval
• Community property states: May need spouse consent

Common Mistakes to Avoid

Outdated Beneficiaries

• After divorce: Ex-spouse still named
• After birth: New children not added
• After death: Deceased beneficiary still listed
• Regular review: Should review beneficiaries every 2-3 years

Vague Designations

• "My children": Who qualifies? Adopted? Step-children?
• "My estate": Subjects proceeds to probate
• First name only: "John" - which John?
• Use full legal names: Including middle names, dates of birth

No Contingent Beneficiary

• Primary dies first: Proceeds go to estate
• Always name contingent: Even if unlikely scenario

Minors as Beneficiaries

• Cannot receive directly: Minors can't legally receive large sums
• Requires guardian: Court appoints guardian to manage money
• Use trust instead: Better to establish trust for minors

Example of Clear Designation:

Primary Beneficiaries:
- Jane Marie Doe (spouse)
  DOB: 01/15/1985
  SSN: XXX-XX-1234
  Share: 100%

Contingent Beneficiaries:
- John David Doe Jr. (son)
  DOB: 03/22/2010
  SSN: XXX-XX-5678
  Share: 50%

- Mary Elizabeth Doe (daughter)
  DOB: 07/08/2012
  SSN: XXX-XX-9012
  Share: 50%

Distribution: Per stirpes

What Is Policy Ownership?

The policyowner has all rights and control over the policy.

Owner vs. Insured vs. Beneficiary

These can be (and often are) different people:

• Owner: Controls policy (can change beneficiaries, borrow, surrender)
• Insured: Person whose life is insured (whose death triggers benefit)
• Beneficiary: Receives death benefit proceeds

Example:

Business-owned policy:
- Owner: ABC Corporation
- Insured: Key employee John Doe  
- Beneficiary: ABC Corporation

Parent-owned policy:
- Owner: Mother
- Insured: Adult son
- Beneficiary: Grandchildren

Ownership Rights

Policyowner has right to:
- Name/change beneficiaries (if revocable)
- Borrow against cash value
- Surrender policy for cash value
- Assign policy as collateral or gift
- Change ownership
- Select dividend options (participating policies)
- Exercise non-forfeiture options
- Add or remove riders (within limits)
- Select settlement options

Types of Ownership

Individual Ownership

• Single owner: One person owns policy
• Most common: Typically insured owns their own policy
• Full control: Owner has complete control

Joint Ownership

• Two or more owners: Multiple people own policy together
• All must consent: Usually requires all owners' signatures for changes
• Survivorship: Typically joint tenants with right of survivorship

Third-Party Ownership

• Non-insured owner: Someone other than insured owns policy
• Business policies: Employer owns policy on employee
• Parent-owned: Parent owns policy on child
• Estate planning: Adult child owns policy on parent

Changing Ownership

Transfer of Ownership

Owner can transfer ownership to another person:

1. Complete assignment form: Absolute assignment form
2. Owner signature: Current owner signs
3. Submit to insurer: Company records change
4. New owner control: New owner assumes all rights

Tax Implications

• Gift tax: Transfer may be taxable gift (if valuable policy)
• Estate planning: Transfer removes policy from estate
• Three-year rule: Death within 3 years brings back to estate

Assignment is transfer of ownership rights in a policy.

Types of Assignment

Absolute Assignment

Complete, permanent transfer of all ownership rights.

Characteristics:
- Permanent: Irreversible transfer
- All rights transferred: New owner has complete control
- Common uses:
- Gift to family member
- Transfer to trust
- Sale of policy (life settlement)
- Estate planning

Example:

Father owns $500,000 policy on his life
Gifts policy to adult son (absolute assignment)
Son now owns policy:
- Can change beneficiaries
- Can borrow or surrender
- Father no longer has any rights
- Father's death triggers payment to son's designated beneficiary

Collateral Assignment

Temporary transfer of certain rights as security for a loan.

Characteristics:
- Temporary: Only lasts until loan repaid
- Limited rights: Lender gets only rights needed to secure loan
- Common uses:
- Secure business loan
- Collateral for mortgage
- Guarantee debt repayment
- Owner retains: Most ownership rights during assignment

How It Works:
1. Lender requires security: Bank wants collateral for loan
2. Policy assigned: Owner assigns policy to lender as collateral
3. Lender's rights: If owner defaults, lender can collect from policy
4. Owner's rights: Owner still pays premiums, maintains policy
5. Loan repaid: Assignment ends, full rights return to owner

Lender's Rights:
- Notification: Be notified if premiums not paid
- Death benefit: Collect loan amount from death benefit if insured dies
- Surrender: May surrender policy if owner defaults

Owner's Rights:
- Cannot change beneficiary: Without lender consent
- Cannot borrow more: Against policy without lender consent
- Cannot surrender: Without lender consent
- Must pay premiums: To keep policy in force

Example:

Business owner needs $100,000 loan
Bank requires collateral
Assigns $500,000 policy as collateral:

While loan outstanding:
- Bank has security interest
- Owner pays premiums
- Owner cannot borrow or surrender without bank approval
- If owner dies: Bank receives $100,000 + interest; beneficiary gets rest

After loan repaid:
- Assignment terminated
- Owner regains full control
- Can change beneficiaries, borrow, surrender freely

Assignment Notification

• Must notify insurer: Assignment not effective until insurer notified
• Insurer not responsible: For knowing about assignments unless notified
• Form provided: Insurers provide assignment forms
• Company records: Insurer updates records with assignment

Community Property States

Nine community property states: AZ, CA, ID, LA, NV, NM, TX, WA, WI

• Spouse has interest: Spouse may have rights to policy even if not named beneficiary
• Consent required: May need spouse consent to name someone else as beneficiary
• Divorce impact: Community property laws affect policy division

Facility of Payment Clause

• Small amounts: Allows insurer to pay benefits to anyone with claim to proceeds
• Typically $1,000-2,000: For small industrial policies
• No probate: Avoids need for estate administration
• Examples: Funeral home, family member who paid expenses

Common Disaster Clause

Uniform Simultaneous Death Act:
- If both die simultaneously: Insured presumed to survive beneficiary slightly
- Proceeds to contingent: Death benefit goes to contingent beneficiary
- Avoids probate: Prevents proceeds from going through beneficiary's estate

Spendthrift Clause

• Protects beneficiaries: Prevents creditors from accessing proceeds before received
• Cannot assign: Beneficiary cannot assign or borrow against future benefits
• Once received: Protection ends once beneficiary receives money

• Primary beneficiary: First to receive death benefit; contingent is backup
• Revocable beneficiary: Can be changed without consent (most common)
• Irrevocable beneficiary: Requires consent to change; owner rights severely limited
• Per stirpes: Deceased beneficiary's share to their descendants (by branch)
• Per capita: Deceased beneficiary's share split among surviving beneficiaries (by head)
• Owner ≠ insured: Owner controls policy; insured is covered life; can be different people
• Only owner can change beneficiaries: Not insured (unless also owner)
• Minor beneficiaries: Require guardian or trust; cannot receive directly
• Always name contingent: Prevents proceeds from going to estate
• Absolute assignment: Complete permanent transfer of ownership
• Collateral assignment: Temporary transfer as loan security
• Assignment requires insurer notification: Not effective until company notified
• Community property states: Spouse may have rights requiring consent
• Common disaster: If both die simultaneously, insured presumed to survive beneficiary
• Estate as beneficiary: Subject to probate, creditors, and potentially taxes
• Irrevocable = gift: Naming irrevocable beneficiary may be taxable gift