Life insurance beneficiaries — primary, contingent, and revocable

Beneficiary designation is the most overlooked part of buying life insurance — and the most common source of post-death legal problems. Here’s how to get it right.

Primary and contingent beneficiaries

Every policy has at least two layers:

Primary beneficiary: the person (or entity) who receives the death benefit when you die. If you name multiple primary beneficiaries, you specify each one’s percentage.

Contingent beneficiary: the person (or entity) who receives the death benefit if the primary beneficiary is deceased or unreachable at the time of your death. Always name a contingent — failure to do so can send the benefit through probate.

Example:

• Primary: Spouse (100%)
• Contingent: Children (50% each)

If your spouse predeceases you and you forgot to update the policy, the contingent beneficiaries (children) receive the benefit.

Revocable vs. irrevocable

Revocable beneficiary: you can change the designation anytime without their consent. This is the default for most policies.

Irrevocable beneficiary: you cannot change the designation without their written consent. Used in specific situations:

• Divorce settlements where life insurance secures alimony or child support
• Buy-sell agreements with business partners
• Loans secured by life insurance

For most personal policies, revocable is correct.

Per stirpes vs. per capita

If you name multiple beneficiaries and one predeceases you, what happens to their share?

Per stirpes: their share passes to their descendants. If you name three children equally and one dies before you, their share passes to their children (your grandchildren).

Per capita: their share is redistributed among the surviving named beneficiaries. If you name three children and one dies, the remaining two split the full benefit.

Most people want per stirpes (especially with grandchildren), but per capita is the default in many policies. Specify explicitly when designating multiple beneficiaries.

Who not to name directly

Minor children: insurance companies won’t pay benefits directly to a minor. Without proper planning, the court will appoint a guardian (often with court supervision and fees) to manage the funds until the child reaches majority — at which point they receive the full amount at age 18.

Better: name a trust as beneficiary, with the children as trust beneficiaries. The trust can specify how funds are managed, when distributions occur, and what happens if multiple events change the picture. Or name a UTMA custodian for smaller benefits.

Special-needs dependents: never name them directly. Receiving a large insurance payout can disqualify them from means-tested government benefits (SSI, Medicaid). Use a special-needs trust instead.

Disabled or financially-vulnerable adults: trusts can protect benefits from creditors, divorces, or poor financial decisions.

Updating beneficiaries

Review beneficiary designations after every major life event:

• Marriage
• Divorce (this is the most-litigated insurance issue — many people forget to update after divorce, and the ex-spouse receives the benefit)
• New child
• Death of a previously-named beneficiary
• Major estate planning changes

Most carriers let you update beneficiaries online or via a simple form. Do it the same day as the triggering event.

The ex-spouse problem

The single most common beneficiary error: forgetting to update after divorce. The named beneficiary inherits the policy, even if the divorce decree said otherwise — because beneficiary designations supersede wills and divorce decrees in most states.

Some states automatically revoke an ex-spouse beneficiary upon divorce, but many do not. Don’t rely on state law. Update the designation manually.

When to use a life insurance trust

For high-net-worth estates (above the federal estate tax exemption), an irrevocable life insurance trust (ILIT) holds the policy and removes the death benefit from your taxable estate. This is a specialized strategy requiring estate attorney involvement, but it can save significant estate tax.

For most middle-class families, naming a revocable trust as beneficiary is unnecessary — the death benefit passes outside probate to named beneficiaries directly.