How to Choose a Life Insurance Beneficiary: Rules, Mistakes, and Best Practices

What Is a Life Insurance Beneficiary?

A life insurance beneficiary is the person, organization, or entity you designate to receive the death benefit when you die. It is one of the most important decisions you make when setting up a policy. A $1 million policy is worthless if the proceeds end up in the wrong hands, get tangled in probate, or sit frozen in a court proceeding for years.

When you buy life insurance, the insurer asks you to name one or more beneficiaries on a designation form. This legally binding document tells the company exactly who should receive the proceeds when you die. The designation exists outside of your will and outside of probate, which means the money can reach your loved ones quickly — often within two to four weeks of filing a claim.

Types of Beneficiaries

Primary vs. contingent. A primary beneficiary is first in line to receive the death benefit. A contingent beneficiary — the backup — collects only if all primary beneficiaries have predeceased you. If your spouse is your primary and you both die in the same accident, a contingent beneficiary keeps the money out of probate.

Revocable vs. irrevocable. A revocable beneficiary can be changed anytime without consent — this is the default on most policies. An irrevocable beneficiary cannot be removed without their written permission. Irrevocable designations appear in divorce settlements and business agreements where a guaranteed payout is required.

Per stirpes vs. per capita. These terms control what happens if a beneficiary dies before you. Per stirpes passes the deceased beneficiary's share to their descendants. Per capita redistributes it equally among the remaining living beneficiaries. If you name your daughter at 50 percent per stirpes and she predeceases you, her children inherit her share. Per capita would send that share to the other named beneficiaries instead.

Who Can Be a Beneficiary?

Beneficiary rules are flexible. You are not limited to family members:

• Spouse. The most common choice. Community property states may give your spouse a legal right to the benefit regardless of who you name.
• Children. Adult children can be named directly. Minor children should not — see the next section.
• Other family, friends, or domestic partners. Parents, siblings, nieces, nephews, close friends — anyone with an insurable interest can be named.
• Trusts. A revocable living trust or irrevocable life insurance trust gives you control over how and when the money is distributed.
• Charities. You can name a charitable organization to receive all or part of the death benefit.
• Business partners. Partners in a buy-sell agreement often name each other so the surviving partners can buy out the deceased partner's share.
• Your estate. Technically allowed but generally a poor choice, as explained below.

Naming Minor Children as Beneficiaries

One of the most common mistakes parents make is naming minor children directly. Insurance companies cannot pay a death benefit to a minor. If a minor is the named beneficiary, the insurer holds the funds until a court appoints a legal guardian — a process that takes months, costs money in legal fees, and puts a judge in charge of deciding who manages your child's money.

Even worse, once the child reaches the age of majority — 18 or 21 depending on the state — the entire remaining balance is handed over in a lump sum with no restrictions. Giving a teenager hundreds of thousands of dollars with no guardrails is rarely a good outcome.

Better alternatives include a custodial account under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA), which lets you name a custodian to manage the funds. The strongest option is a trust, which lets you specify exactly how the money should be used — education, housing, healthcare — and at what ages the child gains access. You might structure distributions at ages 25, 30, and 35 rather than handing over everything at 18.

Using a Trust as Beneficiary

Naming a trust as beneficiary gives you control over distribution that is not possible when you name an individual. Two types are common.

Revocable living trust. Created during your lifetime and modifiable at any time. The death benefit flows into the trust and is distributed according to its terms — avoiding probate, keeping distribution private, and allowing conditions on payouts. However, the proceeds are still part of your taxable estate because you retain control.

Irrevocable life insurance trust (ILIT). The trust owns the policy, so the death benefit is excluded from your taxable estate. For estates exceeding the federal exemption ($13.61 million per individual as of 2024), an ILIT can save heirs hundreds of thousands in estate taxes. The trade-off: you give up all ownership and control. You cannot change beneficiaries, borrow against cash value, or surrender the policy. An ILIT requires an estate planning attorney and ongoing administration including annual Crummey notices.

Naming Your Estate as Beneficiary

When people leave the beneficiary field blank or do not know who to name, the death benefit defaults to their estate. This is almost always a mistake because it forces the proceeds through probate — eliminating the speed, privacy, and creditor protection that make life insurance valuable.

• Probate delays. The process typically takes six months to two years.
• Creditor claims. Once in the estate, creditors can claim against the proceeds. A named beneficiary's payout is generally protected.
• Legal fees. Attorney, executor, and court costs can consume 3 to 7 percent of the estate value.
• Tax exposure. Routing proceeds through the estate can increase its total value and potentially trigger federal or state estate taxes.

Always name a specific person, trust, or organization. Never leave the beneficiary field blank.

Multiple Beneficiaries

You can name as many beneficiaries as you want. Use percentages rather than dollar amounts — if the death benefit changes, percentages still work correctly. All primary beneficiary percentages must total 100 percent, and the same applies separately for contingent beneficiaries.

A strong designation has at least two layers. Your spouse might be the sole primary beneficiary at 100 percent, with three adult children named as contingent beneficiaries at 33.33 percent each. If all primary beneficiaries predecease you, the contingent layer activates automatically.

If one of several primary beneficiaries predeceases you, the outcome depends on your per stirpes or per capita election. Specify your preference explicitly on the form and update beneficiaries promptly when someone passes away to avoid ambiguity.

Community Property States

In community property states, your spouse has legal rights to your life insurance death benefit that can override your designation. Community property law treats most assets acquired during marriage — including policies paid for with marital funds — as jointly owned.

The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska allows couples to opt in through a written agreement.

If you want to name a non-spouse beneficiary in these states, you typically need your spouse's written consent. Without it, your spouse can challenge the designation after your death and may be entitled to up to 50 percent of the benefit. If you are going through a divorce in a community property state, do not assume the divorce automatically revokes your ex-spouse's designation — check your state's laws and update the form immediately.

Beneficiary Designation vs. Your Will

Many people assume their will controls all their assets, including life insurance. It does not. Your beneficiary designation is a contract with the insurer that supersedes your will, your trust, and any other estate planning document.

If your will says your children should inherit everything but your policy still names your ex-spouse, your ex-spouse gets the money. The Supreme Court confirmed this in Hillman v. Maretta (2013) and Kennedy v. Plan Administrator (2009), ruling that beneficiary designations take precedence over wills and even state laws attempting to revoke a former spouse's status.

The takeaway: treat your beneficiary designation as a separate, equally important estate planning document. Review it every time you update your will and make sure the two are aligned.

When to Update Your Beneficiary

Your designation is not a set-it-and-forget-it decision. Review and update after any of these events:

• Marriage. Your new spouse is not automatically added. Update the designation to include them.
• Divorce. Many states do not automatically revoke an ex-spouse's status. Submit a new form.
• Birth or adoption of a child. New children are not added automatically. Update the designation, ideally through a trust.
• Death of a beneficiary. Without an update, proceeds could default to your estate.
• Major life changes. Retirement, a large change in net worth, a new business partnership, or a family falling out. At minimum, review every two to three years.

Common Beneficiary Mistakes

Estate planning attorneys see the same errors repeatedly. Avoiding these can save your family thousands of dollars and months of delays:

1. Naming minor children directly. Insurers cannot pay minors. A court appoints a guardian, and the child receives the full balance at 18 or 21 with no restrictions.
2. Forgetting to update after divorce. The single most litigated beneficiary issue. Many states do not automatically revoke an ex-spouse's status.
3. Naming your estate. Subjects the death benefit to probate, creditor claims, court fees, and potential estate taxes.
4. Not naming a contingent beneficiary. Without one, the death benefit defaults to your estate if the primary beneficiary predeceases you.
5. Outdated designations. A form from 20 years ago may list people who have died or relationships that have ended.
6. Using vague descriptions. Writing 'my children' instead of full legal names creates ambiguity, especially in blended families.
7. Ignoring community property rules. In community property states, naming a non-spouse without consent can lead to legal challenges and court-ordered redistribution.

How to Change Your Beneficiary

Changing your beneficiary is straightforward in most cases:

1. Contact your insurer. Call customer service, log in online, or reach out to your agent. Request a beneficiary change form.
2. Complete the form. Provide the full legal name, date of birth, Social Security number, and relationship for each beneficiary. Specify percentages, designate primary and contingent, and indicate per stirpes or per capita.
3. Submit and confirm. Return the form and request written confirmation. Keep a copy with your important documents.

If you have an irrevocable beneficiary, you cannot remove them without their written consent. This sometimes arises in divorce settlements where one spouse must maintain a policy with the ex-spouse as irrevocable beneficiary to secure alimony or child support. Changing without consent may require a court order, which is difficult to obtain.

For employer-provided policies, go through your human resources department or benefits portal. ERISA-governed plans have their own spousal consent and change rules, so check for additional requirements.

The Bottom Line

Choosing a beneficiary is not a formality — it is one of the most consequential financial decisions you will make. The wrong choice can send your death benefit into probate, expose it to creditors, or hand money to someone you no longer intend to benefit. The right choice ensures your loved ones receive the full payout quickly and without complications.

Name a specific individual or trust — never your estate. Always add a contingent beneficiary. Use full legal names and percentages, not vague descriptions or dollar amounts. If you have minor children, use a trust or custodial account. If you live in a community property state, understand the spousal consent requirements.

Treat your designation as a living document. Review it after every major life event and at least every two to three years. A five-minute update can prevent months of legal battles and ensure the people who matter most are protected when they need it most. If your situation involves significant assets, blended families, or special needs dependents, work with an estate planning attorney to make sure your beneficiary designations, will, and trusts all work together.