3.2 Beneficiary Designations

The Beneficiary Hierarchy

A beneficiary is the person or entity that receives the death benefit. Designations are layered by priority:

• Primary beneficiary: first in line; receives the proceeds if living at the insured's death.
• Contingent (secondary) beneficiary: receives proceeds only if all primary beneficiaries have predeceased the insured.
• Tertiary beneficiary: third in line, paid only if both the primary and contingent beneficiaries are gone.

If no named beneficiary survives, proceeds default to the policyowner's estate.

Revocable vs. Irrevocable

A revocable beneficiary can be changed by the policyowner at any time without the beneficiary's permission - this is the default. An irrevocable beneficiary holds a vested interest: the owner cannot change the beneficiary, take a policy loan, surrender the policy, or assign it without that beneficiary's written consent.

Trap: With an irrevocable beneficiary, even the owner's normal rights (loans, surrender) are restricted until the beneficiary consents.

Class Designations

A class designation names a group rather than individuals - for example, "my children" or "my surviving children equally." It automatically includes children born after the policy is issued and avoids the need to amend the policy each time the family changes.

Naming The Right Party

The policyowner decides who is named and how. A beneficiary may be a person, a trust, a business entity, a charity, or the estate. Proceeds paid to a named living beneficiary generally bypass probate and are received income-tax-free; proceeds payable to the estate do not. Naming a specific trust is the standard way to control timing and protect minor or special-needs beneficiaries. The producer's job is to ensure designations match the client's intent and stay current after marriage, divorce, or the birth of a child - stale beneficiary forms are a leading cause of proceeds going to the wrong person.

Per Stirpes vs. Per Capita

These Latin terms control what happens when a beneficiary dies before the insured.

Example: A parent names three children equally, per stirpes. One child dies leaving two grandchildren. Per stirpes: that child's one-third splits between the two grandchildren (one-sixth each), and the surviving two children keep one-third each. Per capita: the proceeds simply split between the two surviving children, one-half each, and the grandchildren receive nothing.

Simultaneous Death

When the insured and beneficiary die in a common disaster and the order of death is unclear, the Uniform Simultaneous Death Act and the policy's common disaster clause presume the insured outlived the beneficiary. This directs proceeds to the contingent beneficiary (or estate) instead of passing through the deceased beneficiary's estate, where they could be taxed or claimed by that beneficiary's creditors.

Minors, Estates & Protective Clauses

• Minor beneficiaries: insurers will not pay proceeds directly to a minor. A guardian or trustee must be appointed, or the proceeds are held until the minor reaches majority - so naming a minor without a trust arrangement causes delay.

• Estate as beneficiary: proceeds go through probate, become subject to the insured's creditors, and may be included in the taxable estate. Naming a person directly avoids this.

• Spendthrift clause: when proceeds are paid in installments (not lump sum), this clause protects the unpaid proceeds from the beneficiary's creditors and prevents the beneficiary from assigning future payments.

• Facility-of-payment clause: found mainly in industrial/small policies, it lets the insurer pay a relative or whoever appears entitled (e.g., paid funeral expenses) when no beneficiary is named or the beneficiary cannot be located, simplifying small claims.

Solving Minor & Estate Problems

Because an insurer will not write a check to a minor, planners use a trust as beneficiary, name an adult custodian under the Uniform Transfers to Minors Act, or fund a settlement option (such as interest-only until the child reaches majority). Naming a minor directly without one of these arrangements forces court-appointed guardianship and delays payment.

Naming the estate as beneficiary is usually a mistake on the exam: proceeds that would otherwise pass directly and quickly to a named person instead enter probate, become reachable by the deceased's creditors, and may be pulled into the taxable estate. Naming a living person keeps proceeds out of probate and generally creditor-protected. The practical lesson for producers is to review designations after every major life event - marriage, divorce, a new child - so that proceeds never default to the estate by accident.

How The Designations Interact

Trap: A class designation such as "my children" can unexpectedly include or exclude people - a child born after issue is included; a stepchild not legally adopted may be excluded. Read the wording carefully on exam scenarios.