Insurance Beneficiaries

A beneficiary is the person or interest to which payment of life insurance proceeds will be made upon the death of the insured. The beneficiary provision allows the insured (or the policyowner, if a different person) to direct the proceeds to any person that he or she chooses. Any number of different parties or interests may be designated as beneficiaries. For example, a person or an institution, such as a foundation or charity, can be named as policy beneficiaries. Furthermore, more than one person, or even a class or classes of people, may be designated. The insured individual may also name his or her estate, an institution, a corporation, a trust, or any other legal entity as a beneficiary.

In order to form a valid insurance contract, the policyowner must have an insurable interest in the insured at the time that application for coverage is made; in other words, the death of the insured would result in significant emotional or financial loss for the person. A beneficiary, however, is not required to have an insurable interest, though often does. In many cases, a spouse, parent, or child of the insured person is named as the beneficiary, so the beneficiary does happen to have a coincidental insurable interest in the insured's life.

Not only does the policyowner have the right to designate the beneficiary, he or she also has the right to change that beneficiary designation at will. Virtually all life insurance beneficiary designations are changeable, or revocable. The owner of the policy usually retains the option to change the beneficiary, unless he or she has specifically given up that right. If the right is waived or forfeited, it result's an irrevocable beneficiary and the designation cannot be changed without the beneficiary's consent. An irrevocable designation might be used, for example, when a court orders an individual in a divorce settlement to keep an insurance policy in effect on his or her own life, with an irrevocable beneficiary designation on behalf of the ex-spouse (the primary beneficiary) and the children (the contingent beneficiaries). In the event that the irrevocable beneficiaries die before the insured does, the right to choose the beneficiary may revert back to the policyowner on a "reversionary" basis.

When an irrevocable beneficiary is named, the policyowner gives up the usual ownership rights to the policy and can't exercise them without the consent of the beneficiary. For instance, the policyowner cannot take out a loan against the policy without the beneficiary's approval. Nor can the irrevocable beneficiary designation be changed, unless the irrevocable beneficiary agrees to it. Assume, for example, that Mr. Jones named his wife the irrevocable beneficiary of his life insurance policy. Later, Mrs. Jones earns a windfall in the stock market. Now, if Mr. Jones dies prematurely, she will no longer need the proceeds of his policy at all. They therefore decide to change the beneficiary designation from her name to that of their son. Because the irrevocable beneficiary (Mrs. Jones) agrees to the change, the son can be named beneficiary.