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Successor Beneficiary Rules


Life insurance is built around beneficiaries who will receive the benefits of your life insurance payout when you pass away. However, from time to time, your named beneficiary cannot collect the payment. In that case, the policy passes on to your successor beneficiary. This is a substitute who can receive your insurance benefits instead, like a line of succession to a throne. Here is how it works, but you might want to discuss your entire estate plan with a qualified financial advisor to make sure you’ve fully protected your assets.

How Do Life Insurance Beneficiaries Work?

The idea behind a life insurance policy is to make sure that, after you die, your loved ones are cared for and any other business is paid for. This can serve several purposes. For younger adults, it can be a way of protecting their families against a sudden tragedy. For older adults, it can be a way of helping their loved ones with the costs of their passing. 

Regardless of the reason, when you take out life insurance you name one or more beneficiaries who will collect under the policy. When you die, they receive their payment based on the terms of the policy and its beneficiaries

Types of Beneficiaries

A couple signing the paperwork to be a successor beneficiary

A life insurance policy is split into what are known as “primary” and “secondary” beneficiaries. Secondary beneficiaries are otherwise known as “contingent” or “successor” beneficiaries.

Primary Beneficiaries

When you die, the primary beneficiaries under your policy receive their payment from the insurance company. You can have multiple different primary beneficiaries and you can determine how the policy will be split among them. You have broad leeway to determine this division of assets.

For example, you could have a life insurance policy with your spouse named as the sole primary beneficiary. In that case, at your death, they would receive the entire payment. Or you could have a life insurance policy with your two children and your brother named as the beneficiaries, with your children to each receive 40% of the payment and your brother to receive the remaining 20%. At your death, the life insurance company will distribute your policy benefits in 40%, 40% and 20% shares as you instructed. 

Note that some states have laws around beneficiary rights, such as requiring that you give your spouse a minimum interest. In these jurisdictions, naming and distributing assets to a life insurance beneficiary may work entirely differently. 

Secondary Beneficiaries

Secondary, or “successor,” beneficiaries are named persons who receive a life insurance payout in case a primary beneficiary cannot. Some articles on this subject say that secondary beneficiaries can only receive assets if the primary beneficiary is dead, but this is incorrect. Death is one reason that a primary beneficiary would not receive a policy payout and is generally the most common reason. But on occasion, a primary beneficiary cannot be located, cannot legally receive assets, may decline the payment or is otherwise ineligible. In those cases, the secondary beneficiary will receive their payment.

As with primary beneficiaries, you name secondary beneficiaries and the rules for how they will receive your policy benefits. This is similar to how you would structure a will. If you have a single primary beneficiary, you can name a simple secondary who will collect in case they cannot. If you have multiple primary beneficiaries, it’s important to establish whose payment will flow to which secondary beneficiaries.

For example, say that you have named your children, Susan and Alice, and your brother as primary beneficiaries under your life insurance policy. You might name a single secondary beneficiary who will receive any unclaimed remainders.

Life Insurance Beneficiaries and Estates

If you do not make these instructions clear, your life insurance policy will typically revert to your estate.  As a general rule, any money in your life insurance policy without a legitimate beneficiary will be counted as part of your estate. This can happen in many different ways. For example, if you do not name a primary beneficiary at all, the life insurance company will distribute any payment to your estate. 

This will also happen if your life insurance policy does not have a legitimate beneficiary. If any primary beneficiary is incapacitated and you have no secondary beneficiary or if your secondary beneficiary is not legitimately established, the benefits will revert to your estate. 

In our case above, for example, say that you have named your brother as a primary beneficiary and his wife Melissa as a secondary beneficiary to 20% of your policy payout. In this case, you have named no clear chain of payment after Melissa. If your brother and his wife both predecease you, that 20% of your policy payout will revert to your estate.

Finally, secondary beneficiaries do not collect any payment if the primary beneficiary dies after becoming eligible for their payment. While some jurisdictions may handle the details of this matter differently, in general a life insurance payout becomes the property of the primary beneficiary at the time of the insured’s death. If a beneficiary dies after you, even by a few days, the insurance payment typically goes to the beneficiary and then the beneficiary’s estate.

Bottom Line

A woman talking to her beneficiaries in her life insurance

A successor beneficiary can receive the benefits of your life insurance when you pass away if your primary beneficiary can no longer accept due to being incapacitated or also gone. It can be a good way to protect your assets in the event that something happens that you don’t expect, such as your primary beneficiary not surviving you. Setting these up early on can make sure you’re able to make these elections before you need to make them.

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Photo credit: © Zastrozhnov, ©, ©