What Is a Life Insurance Beneficiary?

Choosing life insurance beneficiaries is more than just a step in financial planning — it’s shaping your legacy. Read on for help with navigating the choices, whether it’s for family, friends, trusts, or charities. Dive in to how to split your legacy among multiple beneficiaries, understand the roles of primary and contingent beneficiaries, and know the difference between revocable and irrevocable options. You’ll also learn why naming a beneficiary is so important, and what could happen if you don’t.

Take on your legacy planning with confidence, whether you’re just starting out or you’re updating your estate plan.

Key takeaways

• A life insurance beneficiary is a person and/or entity named to receive benefits after the policyholder’s death.

• Options for beneficiaries on life insurance are broad, including individuals, trusts, charities, and businesses.

• Understanding the difference between primary, contingent, revocable, and irrevocable beneficiaries is crucial.

• Proper beneficiary designation ensures efficient asset transfer, tax benefits, and the avoidance of probate.

What is a life insurance beneficiary?

A life insurance beneficiary is the individual and/or organization you designate to receive the payout from your life insurance policy after you pass away. It’s a key component in your broader estate planning, ensuring the fruits of your hard work and savings are passed on in a way that reflects your personal wishes and priorities.

When you choose a beneficiary on your life insurance, you’re essentially deciding who will benefit from the financial safety net you’ve put in place. This can be a family member, a close friend, a trust, or even a charitable organization whose cause you support. The beneficiary you choose is a reflection of your relationships, commitments, and values. It’s about ensuring that, in your absence, your financial legacy is entrusted to the right hands, whether that’s providing for your family’s future, supporting a friend’s well-being, or contributing to a cause close to your heart.

Who can be a beneficiary on life insurance?

Choosing a life insurance beneficiary is a flexible decision. A beneficiary can be:

Family members

Commonly chosen, they can include your spouse, children, siblings, or other relatives.

Friends

Suitable for those with whom you have a close bond, or who may depend on you financially.

Trusts for minors

Ideal for managing assets for minors until they reach legal adulthood.

Charities

A way to leave a philanthropic legacy.

Businesses

Useful for business owners for succession planning or ongoing business support.

Can you have more than one life insurance beneficiary?

Absolutely! You can designate multiple beneficiaries of your life insurance policy. This allows you to spread the benefits across several people and/or organizations, ensuring that each receives a portion of the payout. You have the flexibility to specify exactly how much of the policy proceeds each beneficiary should receive, tailoring the distribution to match your wishes and their needs.

What are the different types of life insurance beneficiaries?

Life insurance policies typically have two types of beneficiaries: primary and contingent.

Primary beneficiary

This is the first person, people, or entity designated to receive your death benefit. They are typically those you want to primarily protect or support in the event of your death.

Contingent beneficiary

The designated contingent beneficiary receives the death benefit in the event the primary beneficiary can’t, often due to the primary beneficiary’s death before or at the same time as the policyholder’s, or if the primary beneficiary cannot be located, or refuses the death benefit.

The main difference between the two is their order of priority. The primary beneficiary is the initial recipient, while the contingent beneficiary is an alternate, ensuring your wishes are respected even if the primary beneficiary is unable to receive the benefits.

A contingent beneficiary is sometimes referred to as a “secondary beneficiary.”

What’s the difference between a revocable and an irrevocable beneficiary?

You’ll encounter another important decision when you set up a life insurance policy: choosing between a revocable and an irrevocable beneficiary.

Revocable beneficiary

This option offers flexibility, allowing you to change your beneficiary without their knowledge or consent. It’s most commonly used if you anticipate changes in your relationships or circumstances.

Irrevocable beneficiary

Once chosen, this beneficiary cannot be changed without their agreement (you also can’t make other changes to your policy, such as withdraw money or take out a policy loan without their consent). It’s a more permanent decision, providing guaranteed financial protection for the beneficiary. This is commonly used in marital breakdowns, blended families, and business situations.

If a minor is being considered as an irrevocable beneficiary, it should be noted that neither the minor nor their parent/guardian or even the trustee are able to provide consent to a change of beneficiary. It is usually not possible for the beneficiary designation to be changed if a minor has been designated as an irrevocable beneficiary.

Note for residents of Quebec: In Quebec, a spouse named as a beneficiary is automatically considered irrevocable, unless otherwise stated or in the case of divorce, adding a unique consideration for policyholders in this province.

Why name a life insurance beneficiary?

Choosing a beneficiary on life insurance is essential for several practical reasons.

Direct allocation

The money from your life insurance policy goes directly to the people and/or organizations you’ve chosen, exactly as you planned. This happens outside of your estate, without the time and costs associated with probate. (Probate is the legal process of the courts formally accepting a will.)

Faster access to money

Your beneficiaries usually get the money more quickly, since it doesn’t get tied up in the settling of your estate.

Avoiding legal hassles and costs

Skipping the long and often expensive legal process of probate means potentially saving on fees and time.

Keeping things private

Your financial details stay out of the public eye by not going through probate.

Making life easier for beneficiaries

The whole process becomes simpler for those receiving the money, helping them during a difficult time without added stress.

What happens if there is no beneficiary on a life insurance policy?

In the absence of a named beneficiary on a life insurance policy, the death benefit becomes part of the deceased person’s estate. This shift means the payout is subject to the probate process. Probate is the legal process to prove and gain court approval that the will is the last will and testament of the deceased individual.

Probate can be a lengthy and public process, potentially involving legal fees, if the estate is greater than $50,000, and delays in distributing the assets. Without a designated beneficiary, the streamlined transfer of life insurance benefits is lost, and the proceeds become entangled in the broader estate settlement process.

And because of estate administrative tax, your leftover assets may be much less than if you had named a beneficiary.

How to choose a life insurance beneficiary

Selecting a life insurance beneficiary is a deeply personal and significant choice, reflecting your relationships and your priorities. Consider the following when deciding who should be listed as your beneficiary or beneficiaries.

Financial dependence

Is there anyone who relies on you financially? This could be a spouse, children, aging parents, a friend, or anyone else who depends on your income.

Family considerations

If you’re married, have children or grandchildren, think about how the benefits can support their future.

Charitable intentions

You might want to leave a legacy through charities, organizations, or academic institutions that are important to you.

Business relationships

If you have a business partner, consider how your absence might impact your business and whether they should be a beneficiary.

Remember: There are no set rules for naming a life insurance beneficiary. It’s entirely your decision who receives the payout from your life insurance policy. Your choice should align with your personal circumstances, future goals, and the legacy you wish to leave.

Speak with an RBC Insurance Advisor today to help you navigate these choices with confidence and clarity. They can offer expert guidance on life insurance options and help tailor a plan that fits your unique needs and goals. Don’t hesitate to reach out and start the conversation about how you can effectively pass on your legacy to your loved ones and/or other priorities in your life.