Life insurance is built around beneficiaries who will receive the benefits of your life insurance payout when you pass away. However, from time to time, your named beneficiary cannot collect the payment. In that case, the policy passes on to your successor beneficiary. This is a substitute who can receive your insurance benefits instead, like a line of succession to a throne. Here is how it works, but you might want to discuss your entire estate plan with a qualified financial advisor to make sure you’ve fully protected your assets.
How Do Life Insurance Beneficiaries Work?
The idea behind a life insurance policy is to make sure that, after you die, your loved ones are cared for and any other business is paid for. This can serve several purposes. For younger adults, it can be a way of protecting their families against a sudden tragedy. For older adults, it can be a way of helping their loved ones with the costs of their passing.
Regardless of the reason, when you take out life insurance you name one or more beneficiaries who will collect under the policy. When you die, they receive their payment based on the terms of the policy and its beneficiaries.
Types of Beneficiaries
A life insurance policy is split into what are known as “primary” and “secondary” beneficiaries. Secondary beneficiaries are otherwise known as “contingent” or “successor” beneficiaries.
Primary Beneficiaries
When you die, the primary beneficiaries under your policy receive their payment from the insurance company. You can have multiple different primary beneficiaries and you can determine how the policy will be split among them. You have broad leeway to determine this division of assets.
For example, you could have a life insurance policy with your spouse named as the sole primary beneficiary. In that case, at your death, they would receive the entire payment. Or you could have a life insurance policy with your two children and your brother named as the beneficiaries, with your children to each receive 40% of the payment and your brother to receive the remaining 20%. At your death, the life insurance company will distribute your policy benefits in 40%, 40% and 20% shares as you instructed.
Note that some states have laws around beneficiary rights, such as requiring that you give your spouse a minimum interest. In these jurisdictions, naming and distributing assets to a life insurance beneficiary may work entirely differently.
Secondary Beneficiaries
Secondary, or “successor,” beneficiaries are named persons who receive a life insurance payout in case a primary beneficiary cannot. Some articles on this subject say that secondary beneficiaries can only receive assets if the primary beneficiary is dead, but this is incorrect. Death is one reason that a primary beneficiary would not receive a policy payout and is generally the most common reason. But on occasion, a primary beneficiary cannot be located, cannot legally receive assets, may decline the payment or is otherwise ineligible. In those cases, the secondary beneficiary will receive their payment.