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4.5 Beneficiary Provisions

Types of Beneficiaries​

Revocable Beneficiary: A revocable beneficiary may be changed by the policyowner at any time without the beneficiary's consent. This type of beneficiary does not have a vested interest in the policy and generally has no legal rights while the policy is in force. Most beneficiary designations are revocable.

Irrevocable Beneficiary: An irrevocable beneficiary cannot be changed without the beneficiary's written consent, unless the beneficiary dies. When an irrevocable beneficiary is named, the policyowner cannot make certain changes to the policy without the beneficiary's approval. These actions may include assigning the policy, surrendering or canceling the policy, or taking a policy loan. Because an irrevocable beneficiary has a vested interest in the policy proceeds, their consent is required for changes that could affect the policy's benefits. A divorced spouse who has been granted rights to the policy benefits is an example of an irrevocable beneficiary.

Beneficiary Succession​

Primary Beneficiary: The primary beneficiary is the first individual or entity designated to receive the policy's death benefit upon the insured's death.

Contingent or Secondary Beneficiary: The contingent beneficiary receives the death benefit only if the primary beneficiary is not living at the time of the insured's death. In other words, the contingent beneficiary receives the proceeds if the primary beneficiary predeceases the insured.

Tertiary Beneficiary: The tertiary beneficiary receives the policy proceeds if both the primary and contingent beneficiaries die before the insured.

If no named beneficiary survives the insured, the death benefit is typically paid to the policyowner, if living, or otherwise to the insured's estate.

A policy may name multiple primary or contingent beneficiaries. When more than one beneficiary is named, the policyowner should specify each beneficiary's share as a percentage of the proceeds, unless the intention is for all beneficiaries to share equally.

Beneficiary Designations​

A beneficiary designation is typically selected when the policy application is completed. If the policyowner later chooses to change the beneficiary, the change becomes effective as of the date the request is signed by the owner, even if the insurer receives the notice after the insured's death.

Individual/Named Designation: This type of designation specifically identifies the beneficiary by name, such as Mary Doe (wife) or John Doe (husband). Naming an individual beneficiary clearly identifies who will receive the proceeds and generally helps avoid probate.

Class or Classification Designation: In this designation, beneficiaries are identified by their relationship to the insured rather than by name. The wording must be clear and precise to avoid ambiguity regarding the policyowner's intent. Examples include “children of this marriage” or “the insured's spouse.” This type of designation may create complications in situations involving stepchildren, remarriage, or other changes in family structure.

Additional Examples of Beneficiary Designations:

  • Per Capita: Under a per capita designation, the death benefit is distributed equally among the surviving named beneficiaries if one of the beneficiaries dies before the insured. For example, if an insured names three children as beneficiaries and one child dies before the insured, the remaining two children will share the proceeds equally. In this case, each surviving beneficiary would receive 50% of the death benefit.
  • Per Stirpes: Under a per stirpes designation, the share of a beneficiary who dies before the insured is passed to that beneficiary's heirs. For example, if an insured names three children as beneficiaries and one child dies before the insured, the deceased child's portion of the death benefit is distributed to that child's heirs. In this situation, the two surviving children would each receive one-third of the death benefit, while the remaining one-third would be distributed among the heirs of the deceased child. Note: Unless otherwise specified in the policy, death benefit proceeds are generally distributed on a per capita basis.
  • Estate: The estate may be designated as a tertiary beneficiary if the insured outlives all other named beneficiaries. If no beneficiary survives the insured, the death benefit is typically paid to the insured's estate by default. When proceeds are paid to the estate, the amount becomes part of the estate's total value and may be subject to estate settlement and potential tax implications.
  • Trust: A trust may be named as the beneficiary when the insured does not want the recipient to have direct access to the death proceeds, such as when the beneficiaries are minor children. In this case, the proceeds are distributed according to the terms and instructions outlined in the trust agreement. Trust beneficiaries are also commonly used in estate planning strategies, particularly through the use of an Irrevocable Life Insurance Trust (ILIT).
  • Minors: If minor children are named as beneficiaries and no trust has been established, the insurer may hold the proceeds under a settlement option that accumulates interest until the child reaches the age of majority. During this time, a guardian or legally responsible adult may receive payments for the child's benefit. The remaining proceeds are typically distributed to the minor as a lump sum when the age of majority is reached.
  • Creditor: A creditor may be designated as a beneficiary or may receive rights through a collateral assignment when a life insurance policy is used to secure a debt. In such cases, the creditor is entitled only to the amount owed. To align the coverage with the declining loan balance, the policy may be structured as decreasing term insurance, allowing the benefit to decrease over time as the debt is repaid.

Common Disaster Clause​

The Common Disaster Clause states that if the insured and the primary beneficiary are involved in the same accident, the primary beneficiary must survive the insured by a specified period—typically 90 days—for the death benefit to be payable to that beneficiary. If the beneficiary does not survive the insured for the required period, the insurer assumes that the beneficiary died first. In that case, the death benefit is paid to the contingent beneficiary or, if none is named, to the insured's estate.

For example, suppose Mr. and Mrs. Smith each own life insurance policies naming each other as the primary beneficiary and their children from previous marriages as contingent beneficiaries. If both Mr. and Mrs. Smith die in the same automobile accident, the provision ensures that the proceeds are directed to the contingent beneficiaries rather than passing through the estates of the deceased spouses.

The Uniform Simultaneous Death Act, which has been adopted by all states, addresses situations where the insured and the primary beneficiary die in the same event and the order of death cannot be determined. In such cases, it is presumed that the insured died last, allowing the proceeds to pass to the contingent beneficiary or the insured's heirs.

Spendthrift Trust Clause​

The Spendthrift Clause prevents a beneficiary from assigning or transferring their interest in the policy proceeds to another party. Its purpose is to protect the beneficiary's benefits from claims by creditors before the proceeds are actually received.

This protection generally applies only when the death benefit is held by the insurer under a settlement option that pays the proceeds over time. If the proceeds are paid as a lump sum, the spendthrift protection typically does not apply once the beneficiary receives the funds.

Change of Insured​

The Change of Insured provision is typically included as a rider in corporate-owned life insurance policies, particularly when a covered executive leaves the company or retires.

This provision allows the policyowner to replace the current insured with another individual in whom the owner has an insurable interest, or to exchange the existing policy for a new policy covering a different insured with an insurable interest.

Change of insured provisions are commonly used in business insurance planning to maintain coverage when key personnel change. This allows the policyowner to substitute a new insured without purchasing an entirely new policy and without incurring new upfront costs or surrender charges. The replacement insured must still meet the insurer's insurability requirements.

Facility of Payment Clause​

The Facility of Payment Clause allows the insurer to pay policy proceeds to a relative or another person the insurer determines is entitled to receive the benefits when no properly designated beneficiary exists or when no beneficiary is living. This provision helps avoid delays or potential legal disputes and may also allow the insurer to reimburse an individual who paid expenses on behalf of the insured, such as funeral or burial costs.