Life Insurance Beneficiaries Vs. Will Beneficiaries

A life insurance policy can be an effective way to make sure loved ones are cared for after your death. However, most people also need a last will and testament.

There are significant differences between a life insurance beneficiary and a will. Understanding how these estate planning tools interact will help ensure that assets are distributed according to your wishes.

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Life Insurance Beneficiary Vs. Will Beneficiary

Life insurance beneficiaries receive the policy payout if the policyholder dies during the insurance term. Life insurance policies generally name two types of beneficiaries.

A primary beneficiary is a person or entity (like a charity) that receives the proceeds of your policy.
A contingent beneficiary receives the payout only if the primary beneficiary is unwilling or unable to do so.

Naming a life insurance beneficiary only affects how the insurance company will distribute funds from the life insurance policy. The life insurance company pays the beneficiary directly, and this process isn't affected by your creditors or the probate process.

The term "beneficiary" can also refer to people or entities named in your will who will receive your property when you pass away. A will and life insurance might name the same beneficiary, but they can also designate entirely different beneficiaries.

You can use a will to express your wishes on how your money, real estate and personal property will be divided when you pass away.

Although you can express your wishes through a will, the distribution of your assets may be subject to approval from a probate court. Creditors and close relatives may be entitled to assets, even if they're not mentioned in your will.

Does a Life Insurance Beneficiary Override a Will?

Even though wills and life insurance policies deal with separate funds, there are cases where they contradict one another. A life insurance policy must name a beneficiary, but what happens if your will states that someone else should receive the life insurance payout?

In cases of a named life insurance beneficiary versus a will, the life insurance beneficiary designation will almost always override the will. The insurer is obligated to pay the policy amount to the beneficiary named in the policy regardless of the policyholder's last will and testament. Estate planning laws also recognize that life insurance policies override a will.

You cannot use your will to change who will receive money from your life insurance policy. If you need to change a life insurance beneficiary, you must do it by updating the policy with your insurance company. Life insurance companies usually have a form or process you can follow to update beneficiary designations.

Is a Beneficiary Better Than a Will?

Life insurance beneficiaries do have certain advantages. Life insurance benefits usually don't go through the probate process, which can be long and expensive. Even if your will is disputed in court, your life insurance funds will be paid to the beneficiary. Your creditors can't take the proceeds from a life insurance policy, and in many cases, the funds are also protected from the beneficiary's creditors.

A valid designated beneficiary will directly receive life insurance funds. Therefore, life insurance can be a good way to ensure that your spouse or another beneficiary has money available if you pass away. A life insurance beneficiary can be disputed, but this is less common than the normal probate process. To avoid a dispute, you may wish to take steps like involving witnesses in beneficiary designations.

However, life insurance beneficiary designations don't apply to anything other than the policy benefit. You'll need a will to distribute all of your other property.

Also be aware that a life insurance policy isn't necessarily an easy way to provide for a minor child or someone who's disabled. If the named beneficiary cannot handle the insurance proceeds independently, the payout may have to go through probate. A life insurance policy can still be an excellent way to provide funds for a child or disabled relative, but you may wish to consult with a professional about the best way to handle these situations.