Couple looking over secondary beneficiaries

What Is a Beneficiary?

Updated December 1, 2016 . AmFam Team

What are primary and secondary beneficiaries and what do they mean for your life insurance policy? This quick guide has all the answers.

First-timers to the life insurance world are sometimes thrown for a loop by all the insurance jargon. We understand, and we’re here to help. A good insurance agent will explain everything step-by-step and answer all your questions — in the meantime, we’ve got some helpful resources, like our life insurance terms glossary, to help you understand some important terminology.

One word you’ll see time and again when searching for life insurance is “beneficiary.” Why is a beneficiary an important facet of life insurance? Watch this short video to find out. Then, keep reading to learn about the two basic types of beneficiaries. 

Choosing Your Primary and Secondary Beneficiaries

When you begin to talk about a life insurance policy, your insurance agent will tell you about two basic kinds of beneficiaries: primary and a secondary.

A beneficiary is a person, a number of people or even an entity such as a charitable organization that receives the benefits of a life insurance policy when the insured person passes away. The benefit generally takes the form of a cash payment.

The primary beneficiary, as the name suggests, is the first-named beneficiary, frequently the spouse of the insured. The total policy benefit is usually paid to the primary beneficiary.

The secondary beneficiary (sometimes called the contingent beneficiary) is the person or entity that would receive the benefit if the primary beneficiary is unavailable or unwilling to accept it. For instance, if the primary beneficiary were to die before the insured, the benefit goes to the secondary beneficiary.

You can name more than one primary or secondary beneficiary, and you can choose to allocate whatever percentage of the death benefit to however many primary and secondary beneficiaries as you like. Say you named your spouse and your oldest child as your primary beneficiaries, both to receive 50 percent of the benefit upon your passing. You might also name your two youngest children as 50 percent secondary beneficiaries.

Should your spouse and eldest child not be around to collect your benefit, your two youngest children would each get 50 percent of the death benefit. You can allocate whatever percentage to however many primary and secondary beneficiaries as you’d like, but most choose to financially protect their spouse and children.

Learn more about choosing a life insurance beneficiary.

Beneficiaries Aren’t Always People

As we already mentioned, sometimes a beneficiary is an entity, like a charitable organization or church. In this instance, you can designate all or a portion of your life insurance benefit to an entity of your choice.

Your agent will help you with a beneficiary designation form to ensure your benefit gets in the right hands.

Create a ‘Trust’ for Minor Beneficiaries

When naming minor beneficiaries, creating a trust may make sense. A trust legally holds and protects property (such as money) for future distribution to another person, such as a surviving child.

Here’s why some people prefer to designate a trust in the child’s name. Imagine a scenario where a couple passes away suddenly, leaving a million dollar life insurance benefit payable to the secondary beneficiary — a 10-year-old child. Because the child is a minor, the benefit must be paid to someone on behalf of the child, usually a court-appointed financial guardian. Upon reaching age 18, the child will receive the full amount of the life insurance benefit with no oversight or restrictions.

But, even at that age, the couple’s teenager may not be ready to handle the responsibility of managing such a large sum of money. If the couple had created a trust that would distribute the life insurance benefit when the child is older and more financially savvy, they would have had more peace of mind knowing their child’s finances were better protected.

Divorce and Outdated Beneficiary Designations

It’s important to note that in the event of a divorce, many states have legal requirements that revoke the right of a former spouse, or a member of the family of a former spouse, to receive proceeds upon the death of an insured. In this case, the owner should re-name their beneficiary. However, if they choose to keep the former spouse as the beneficiary, the owner must still name that individual as “former spouse,” “ex-spouse” or some similar form of designation. This should still be done even if there is a court order requiring the former spouse remain as beneficiary.

A problem many insurance companies encounter when settling claims is outdated beneficiary designations. Examples include the primary beneficiary predeceasing the insured, the insured and primary beneficiary have divorced or the primary beneficiary is a minor. Our advice? Stay on top of your policy and be sure to update your beneficiary right away when you face major changes — or at the very least, make a plan to review your beneficiaries at least once a year. Get in touch with your agent to make sure you’re staying on top of things, so in the event of the unexpected, you’ve got everything in the right place.

To learn more about primary or secondary beneficiaries, as well as getting life insurance coverage that’s customized for your needs, talk to an American Family Insurance agent.* Additionally, you can boost your know-how by reading our article about how life insurance works, as well as our life insurance tips for new families.

*American Family agents do not provide legal advice and an attorney should be consulted for details about setting up a trust.

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