3.3 Beneficiaries & Ownership

Beneficiary Classes and Designations

The beneficiary is the party who receives the death benefit. Beneficiaries are ranked by priority:

• Primary beneficiary: First in line to receive the proceeds.
• Contingent (secondary) beneficiary: Receives proceeds only if no primary beneficiary survives the insured.
• Tertiary beneficiary: Third in line, paid only if both primary and contingent are gone.

If multiple primary beneficiaries are named, proceeds are split as the owner directs; if one primary predeceases the insured, that share usually goes to the surviving primaries, not the contingent (unless per stirpes is specified).

Designations may be specific (named individual), class (e.g., "my children"), or estate. Beneficiaries should be clearly identified to avoid disputes.

Proceeds paid to a named, living beneficiary bypass probate and are generally income-tax free. If the estate is named as beneficiary, the proceeds become part of the probate estate - exposed to creditors, probate delay, and possible inclusion in the taxable estate.

Revocable vs. Irrevocable; Per Stirpes vs. Per Capita

A revocable beneficiary is the default: the owner may change the beneficiary at any time without consent. An irrevocable beneficiary has a vested right - the owner cannot change the beneficiary, borrow against cash value, or surrender the policy without that beneficiary's written consent.

When a beneficiary dies before the insured, distribution depends on the method chosen:

• Per stirpes ("by branch" / by the roots): A deceased beneficiary's share passes down to that person's descendants. If a son dies first, his children split his share.
• Per capita ("by head"): Proceeds are divided equally among the surviving named beneficiaries; a deceased beneficiary's share is redistributed to the survivors, not to that person's children.

Example: A parent leaves the benefit equally to three children. One child dies first leaving two kids. Per stirpes - the deceased child's third goes to the two grandchildren. Per capita - the two surviving children split the entire benefit 50/50.

Simultaneous Death, Spendthrift, and Facility of Payment

The common disaster clause and the Uniform Simultaneous Death Act (USDA) address situations where the insured and the primary beneficiary die at the same time or so close together that order of death is uncertain. The law presumes the insured died last (survived the beneficiary), so the proceeds pass to the contingent beneficiary or, if none, to the estate - keeping the money out of the deceased beneficiary's estate. A common disaster clause may require the beneficiary to survive a stated period (e.g., 30 days) to collect.

The spendthrift clause protects a beneficiary who receives proceeds under a settlement option (installments). It prevents the beneficiary from assigning or commuting future payments and shields those payments from the beneficiary's creditors until paid out.

The facility-of-payment clause (common in industrial/small policies) lets the insurer pay a limited amount to a relative or whoever appears entitled - typically someone who paid funeral or last expenses - when no beneficiary is named or the beneficiary cannot be located.

Minor Beneficiaries and Ownership Rights

Life insurers generally cannot pay proceeds directly to a minor because a minor cannot give valid legal release. If a minor is the beneficiary, options include naming a guardian, establishing a trust to receive and manage the funds, or using the Uniform Transfers to Minors Act (UTMA) custodial arrangement. Otherwise a court must appoint a guardian, delaying payment.

The owner (often, but not always, the insured) holds all the ownership rights, including the power to:

• Name and change the beneficiary (if revocable)
• Assign the policy (absolute or collateral)
• Borrow against and surrender cash value
• Select dividend, nonforfeiture, and settlement options
• Designate or change ownership

Third-party ownership exists when the owner is not the insured (for example, a spouse or business owns a policy on another person). The owner must have an insurable interest at the time the policy is issued. Changing the beneficiary normally requires only written request to the insurer (recorded on a change-of-beneficiary form); under the endorsement method the insurer must record the change, while the older recording method simply files the request.

Trusts, Estates, and Common Beneficiary Mistakes

Naming the estate as beneficiary is usually discouraged. Proceeds then pass through probate, become reachable by the deceased's creditors, and may be counted in the taxable estate - the opposite of the protection a named beneficiary provides. A trust can be named instead to direct how and when minor or financially inexperienced beneficiaries receive funds.

Several traps appear repeatedly on the Texas exam:

• A revocable beneficiary has no rights while the insured is alive; only an irrevocable beneficiary's consent is needed for changes.
• If a primary beneficiary predeceases the insured and no per stirpes language exists, that share goes to the surviving primaries, not the contingent class.
• A beneficiary who murders the insured is barred from collecting under the slayer statute; proceeds pass to the contingent beneficiary.
• Beneficiary designations on the policy override conflicting instructions in a will, because life insurance is a contract that passes outside probate.

A producer reviewing a client's coverage should confirm that beneficiary designations are current after major life events - marriage, divorce, birth, or death - since outdated designations are a leading cause of misdirected proceeds.