Naming a Life Insurance Beneficiary: What Families Get Wrong
Tom had not thought about his life insurance beneficiary form in 11 years. He bought the policy shortly after his first marriage, named his then wife as beneficiary, and never revisited the paperwork through a divorce, a remarriage, and the birth of two children with his current wife.
It was only after losing his father and going through his estate documents that he realized updating his life insurance beneficiaries was a real priority. Nothing in his will could change that outcome. Beneficiary designations operate outside of a will entirely, and in his state, updating them requires proactively notifying the insurance company. Divorce alone doesn’t do it.
Tom’s situation is more common than most people assume, and it illustrates why a beneficiary form deserves the same attention as any other major financial document, not a one-time decision made at the time of purchase and forgotten afterward.
Why the Beneficiary Form Overrides the Will
A life insurance policy is a contract between the policyholder and the insurance company. The beneficiary named on that contract is legally entitled to the death benefit, regardless of what a will or trust says. If a will states that assets should be divided evenly among children, but a life insurance policy names only one child as beneficiary, the insurance company will pay according to the policy, not the will.
This is one of the most consequential and least understood aspects of estate planning, and it is why beneficiary designations should be reviewed alongside, not separately from, a broader estate plan.
When a Life Insurance Beneficiary is a Minor
One of the most frequent errors that families make is naming a child directly as a beneficiary. Insurance companies are generally not permitted to pay a death benefit directly to anyone under age 18, regardless of the policy’s terms.
When a named beneficiary is a minor, the result is often a court-supervised guardianship or conservatorship, a process that can take a year or longer, depending on how complex the case is. It may also come with legal costs and court oversight of the funds until the child reaches adulthood. For a family that was not anticipating this delay, this can be a devastating setback.
The more effective approach is to name a trust as beneficiary, with instructions for how and when funds should be distributed as the child grows, or to name a custodian under a Uniform Transfers to Minors Act (UTMA) arrangement for smaller amounts. Either option allows funds to reach a child’s care more quickly and with clearer guardrails than a court supervised process.
The Role of the Contingent Beneficiary
Every policy should generally include both a primary beneficiary and a contingent beneficiary. The contingent beneficiary receives the death benefit only if the primary beneficiary has died before the policyholder or cannot be located.
Many policyholders only name a primary beneficiary and leave the contingent field blank, assuming it won’t matter. Without a contingent beneficiary on file, a death benefit can end up flowing into the policyholder’s estate instead of directly to a chosen individual, which typically means the funds become subject to probate, creditor claims, and delays that a direct beneficiary designation is specifically designed to avoid.
Life Events That Should Trigger a Review
Financial professionals generally recommend reviewing beneficiary designations after any major life event, including marriage, divorce, the birth or adoption of a child, or the death of a previously named beneficiary.
“A five-minute oversight on a beneficiary designation has the power to completely redirect a life insurance legacy,” says Daniel Lerner, Executive Vice President, Investment Services at David Lerner Associates.
“Taking a few minutes now to make sure your policy reflects your current wishes can save your loved ones a great deal of time, stress, and expense later.”
What Tom Did Next
Tom updated his beneficiary designation the same week he discovered the error, naming his current wife as primary beneficiary and his two children as contingent beneficiaries through a trust his wife helped establish. The fix itself took less than an hour. What it required was simply looking, something Tom had not done in over a decade.
Beneficiary forms can be easy to set once and forget, but they often carry real financial consequences without being revisited. A periodic check, ideally every few years or after any major life change, is a small task that protects a family from a mistake that can be very difficult to unwind after the fact.
Material contained in this article is provided for information purposes only. It is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. These materials are provided for general information and educational purposes, based on publicly available information from sources believed to be reliable. We cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
The subject of this article is fictitious and created for illustrative purposes only. It is based on events of a similar nature and should not be interpreted as a direct depiction of any specific individual, organization, or incident. Any resemblance to actual persons, living or deceased, or actual events is purely coincidental. David Lerner Associates does not provide tax or legal advice.