NEW YORK, February 3, 2023 (Newswire.com) - iQuanti: A life insurance policy can be a great way to pass on a financial legacy to your heirs. But are you just limited to listing your family members as beneficiaries? Here, we'll explain what a life insurance beneficiary is and whether policy owners can list their friends as one of them.

What is a Beneficiary?

A beneficiary is a person or entity that will receive the proceeds of your life insurance policy after you pass away. By contract, the death benefit will be paid to any name listed as a beneficiary in the proportions you've assigned to them.

One of the major advantages of someone being named a beneficiary is that they'll receive this death benefit outside of probate, the court process used to settle your state. Life insurance policies are considered non-probate assets. This means that while the deceased's heirs are waiting for the court to decide how items within the estate (such as a home, bank accounts, etc.) will be divided, the life insurance company is free to pay the beneficiaries their contractual amount.

Primary vs. Contingent Beneficiary

With most life insurance policies, beneficiaries can be named as one of two types:

• Primary beneficiary: This is the person who will be paid first by the insurance company. If more than one person is listed, the policyholder must assign a percentage to each name, indicating the proportion of the death benefits they should receive.
• Contingent beneficiary: If none of the primary beneficiaries can receive the payout from the life insurance company, those listed as contingent beneficiaries will be the next in line to be paid.

A common scenario is when one spouse designates the other spouse as their primary beneficiary and assigns them 100% of the death benefit. If the insured spouse passes away, the surviving spouse receives the payout. However, if both spouses were to pass away (such as from an auto accident) and the children were listed as contingent beneficiaries, then they would receive the death benefit instead.

Can Friends Be Named as Beneficiaries?

Generally speaking, yes. Life insurance beneficiaries can be anyone:

• Family members
• Non-family members, including friends
• Trusts
• Charities

The only caveat is if you are married and live in what's called a "community property state." This is where the law requires that your spouse must be a primary life insurance beneficiary.

In this case, it doesn't matter if you've listed one of your friends to receive 100 percent of the death benefit. The courts may still intervene and will likely rule that your spouse must be paid a portion of the insurance proceeds.

The only way around this is to ask your spouse to sign a waiver. This is a legal forfeiture of their rights to your life insurance death benefit and allows you to name whoever you want as the primary beneficiary with complications.

A common example of the scenario might be couples who are separated but not legally divorced. Even though they are no longer together, if one spouse were to pass away, the other would still have a claim to the death benefit under community property law.

How to Designate a Friend as the Beneficiary

Assigning beneficiaries is a relatively simple process. Most insurance companies have online platforms where the policyholder can simply log in and change the information whenever they please.

Sometimes other companies may have a form that needs to be filled out and submitted back to the life insurance company for review. Either way, it usually takes less than 15 minutes to check your beneficiaries and make changes if necessary.

The Bottom Line

You can designate anyone you want as the beneficiary of your life insurance policy. The only catch is that if you live in a community property state, you'll have to get your spouse to sign a waiver. Regardless, policy owners would be wise to get in the habit of regularly reviewing who they named as beneficiaries at least once per year and making changes as necessary.