It's always good to start with the official definition:



An individual, institution, trustee or estate which receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust or other contract upon the death of a certain person.

Now that we have that out of the way...a beneficiary is essentially the person who will receive money when the benefits are triggered. In most cases, this is a spouse, children, or other family members.

It's the person or entity you list in the term life insurance plan to receive the death benefit.

It can be:

one person

two or more people

trustee or trust you have already established

a charity

your estate.

Primary and Secondary or Contingent Beneficiaries

There's usually a pecking order to the list of beneficiaries. The life benefits will be paid to the primary beneficiary if available and possible. Otherwise, the policy will usually pay out to the secondary or contingent beneficiary. It's possible to designate more than one person as the primary beneficiary with some sort of percentage split among them.

In most cases, the beneficiary is pretty self-explanatory but you want to make sure to be clear. For example, you would not want to list "spouse" as the beneficiary. It's better to use the spouse's name and even SS# otherwise, ex-spouses might lay claim to the benefit and this result in disputes, which is the last thing you intended. Clear and precise is the rule of order when choosing beneficiaries. You can make changes to this area but it's best to change it immediately or better yet, designate it correctly from the beginning to avoid potential disputes and issues. It makes sense to specifically name someone if that's your intent to avoid the delay and cost of probate (where benefits go through the estate instead of direct to a person).

Clarity in how the benefits is to be paid to beneficiaries is also extremely important with term life insurance policies. For example, if you have three children and designate an equal amount to each, what happens if one deceases before you or cannot be found? Specify exactly how this type of situation would be handled so there's no confusing. Wills are not a substitute for properly naming your term life beneficiary as wills traditionally deal only with estate issues (probate). Probate is subject to taxes and creditors so it's important to name a person's name directly as a beneficiary to avoid this.

Try not to use exact dollars as the amounts can become outdated. Percentages stay true regardless. Try not to use your estate as the beneficiary as that opens up your life benefit to probate, taxes, etc. One of the great benefits of life insurance if the beneficiaries are properly listed is that it avoids the issues associated with estates. In some states, listing minors as beneficiaries can pose problems since they may be required to have a legal guardian appointed by the court to manage their money.