How to name a beneficiary for a life insurance policy

If you have loved ones who rely on you, you may have purchased a life insurance policy to protect them in case you pass away unexpectedly. You may assume that, when you pass, the payout from your policy will automatically go to your family. But in truth, you need to name a beneficiary to your policy. This ensures your loved ones can access the money quickly upon your passing.

Designating a beneficiary for your life insurance policy only takes a few minutes. And it ensures the most important people in your life receive funds quickly and easily, at a time they likely need them the most.

What is a beneficiary?

In the case of your life insurance policy, a beneficiary is the person or organization you choose to receive the insurance proceeds. There are two types of beneficiaries you can name on your insurance policy:

• Your primary beneficiary is the first person you want to receive the benefit from your life insurance policy when you pass away.
• Your contingent beneficiary, or secondary beneficiary, will receive the benefit if your primary beneficiary can’t or won’t.

A life insurance policy is considered a non-probate asset. This means your beneficiary can receive the payout from the policy faster than if they had to wait for it to go through probate. Probate is a court-supervised process that distributes your property to the people you’ve named to receive it. In states like California, probate can be long and expensive. That’s one reason why it’s beneficial that your insurance policy can bypass it.

Since your life insurance policy is a non-probate asset, you shouldn’t include it in your last will and testament. If you did list a beneficiary for your life insurance policy in your will, whoever you name in your beneficiary designation form will override it. That’s why it’s important to review your life insurance beneficiary designation every three to five years to make sure it’s up to date.

How to name a beneficiary on your life insurance policy

When designating a beneficiary, you should provide your beneficiary’s full legal name, address, date of birth, Social Security number, and relationship to you. This information makes it easy for your insurance provider to verify their identity when they try to collect.

Depending on your provider, there may be multiple ways to designate a beneficiary. Here are several potential options:

• Fill out the beneficiary designation form supplied by your insurance provider. Beneficiary designation forms are usually available on your provider’s website. You can print them, fill them out, and mail them back to your provider.
• Set your beneficiary designations directly through an online portal on your provider’s website.
• Call your provider and designate your beneficiaries over the phone.
• Use FreeWill’s beneficiary designation platform. We provide step-by-step instructions for how to reach out to your provider to designate your beneficiaries, including specific phone numbers and help lines. You’ll receive all your beneficiary information on a printable page that you can store with your other estate planning documents.

No matter how you set your beneficiaries, it’s a good idea to follow up with your provider to make sure they received and recorded your designation. Also consider keeping a copy of your insurance policy with your other estate planning documents. That way, your loved ones can find your policy details and notify your provider to receive the payout if you were to pass away.

Since your life insurance policy and preferred beneficiary will likely change over the course of your life, it’s a good idea to keep your updated beneficiary designation with your records.This will make it easy for your loved ones to determine which policies are in force and who is named as beneficiary.

Who can be a beneficiary on a life insurance policy?

Generally, you can name almost anyone as your beneficiary. If you’re married, however, your spouse may be entitled to a portion of your life insurance proceeds. This is true even if you try to name someone else as a beneficiary. Otherwise, here are some options you can consider:

Designate a family member or friend.

This includes your spouse, domestic partner, child(ren), relatives, or friends. You don’t need to be related to someone to name them as a beneficiary. However, there are a couple of restrictions you should consider.

If you’re married and live in a community property state, the law usually requires your spouse to be a life insurance beneficiary. Even if you choose someone else to inherit 100% of the insurance proceeds, your spouse will likely receive a portion of the payout anyway, unless they give you written permission to name someone else. One way they can do this is by signing a spousal waiver form, in which they give up their inheritance right to the insurance proceeds.

Designate a trust in your will.

A trust is a legal agreement that lets you give a third party the authority to manage your assets on behalf of your beneficiaries. This third party is called a “trustee.”

Let’s say you use your will to create a trust for your beneficiary. You have the option to name your trust as the beneficiary of your life insurance policy. When you pass away, your trustee will receive the proceeds and manage them according to your preferences. In the case of a minor beneficiary, they’ll directly inherit the proceeds when they reach adulthood (usually at age 18) unless you specify otherwise.

If you want to name a trust in your will as the beneficiary of your life insurance policy, it’s a good idea to speak with an estate attorney.

Designate a charity or nonprofit organization.

It comes as a surprise to some people, but you can designate a charity as the beneficiary of your life insurance policy (and any other assets you own!). It’s a meaningful, effective way to create a lasting legacy, both for yourself and for causes that are closest to your heart.

If I have beneficiary designations in place, do I still need a will?

Yes — it’s always a good idea to have a will! Only certain assets are able to skip probate. Any other assets you own — including your home, vehicles, certain bank accounts, and even your pets — will likely have to go through the probate process. Having a will saves time, money, and stress for your loved ones. And if you have minor children, you can use a will to name a guardian for them and make sure they’re taken care of by someone you trust.

Don’t have a will? You can create one for free in less than 20 minutes.

Why is it important to name a beneficiary on a life insurance policy?

You may be asking yourself: Why bother naming a specific beneficiary for your life insurance policy?

Your life insurance policy is a non-probate asset. This means it’s able to skip probate and go straight to your beneficiary — but only if you designate one. There are several benefits to this

• It makes the process easier for your beneficiary. They will inherit your life insurance payout much faster if it can skip probate. That can make a huge difference for a surviving spouse who needs the money to continue paying a mortgage, household bills, and more.
• You can name a beneficiary who wouldn’t otherwise inherit from you — like your favorite charity. According to the law, a charity or non-relative would never be entitled to inherit from you unless you specify they should. Naming a beneficiary for your insurance policy gives you control over who receives the payout.
• It streamlines the process for everyone involved. If you were to pass away, it’s your beneficiary’s responsibility to notify your insurance company and claim the payout. By choosing a beneficiary — and keeping a record of this information — you help your beneficiary to receive their payout without delay or confusion.

The irrevocable life insurance trust

An irrevocable life insurance trust, or ILIT, is a type of trust used to reduce or eliminate estate tax. It takes some effort to set up and maintain, and is usually only relevant for people with very large estates. Here’s how it works.

When you pass away, the payout from your life insurance policy is included in your taxable estate (along with your other assets, like your real estate property, stock and brokerage accounts, and more). If your estate’s total value is higher than the federal estate tax exemption (which is $12.92 million for individuals in 2022), your estate may have to pay estate tax on your assets. In other words, if your estate is worth more than $12.92 million, you may be subject to estate tax. The exemption is scheduled to drop to around $6 million at the end of 2025 — meaning if your estate is worth more than $6 million, it could be subject to estate tax after 2025. Some states also have an estate tax, and their thresholds may be lower.

You can prevent your life insurance proceeds from being included in your taxable estate by placing your policy in an ILIT. The ILIT then becomes both the owner and the beneficiary of your life insurance policy, and you name a trustee to administer the trust. To take full advantage of this more complex planning, it’s a good idea to work with an estate attorney to draw up your ILIT.

Choosing a life insurance beneficiary provides peace of mind

Your life insurance policy helps you care for your loved ones after you pass away. But to provide the most benefit, you need to specifically name a beneficiary for your policy and keep it up to date. FreeWill’s beneficiary designation platform will walk you through the process in just a few minutes.