Beneficiaries can be classified from various points of view. For the purposes of this discussion, they will be classified as to

From the standpoint of the interest involved, beneficiaries fall into two broad categories:

The insured is normally designated as the person to receive the proceeds of an endowment insurance policy or a retirement income policy because those policies are designed primarily to provide benefits to the policyowner. The insured may designate someone else to receive the proceeds in the event of his or her death or may specify that the proceeds be payable to his or her estate. Proceeds are usually made payable to the estate only for a purpose associated with the settlement of the estate, such as the payment of last-illness and funeral expenses, debts, mortgages, and taxes. If any proceeds remain after the claims against the estate have been satisfied, they are distributed in accordance with the decedent�s will or the appropriate intestate law.

Payment to the insured�s estate is generally unwise because it exposes the proceeds to transfer costs and taxes that can otherwise be avoided. It is also considered highly undesirable to have the policy proceeds payable to the insured�s estate when it is intended that they should go to certain specific individuals. The proceeds will be subject to estate administration and may be reduced through probate costs, taxes, and the claims of creditors. Moreover, distribution to the intended beneficiaries will be delayed until settlement of the estate has been completed.

When it is intended that the proceeds be paid to the insured�s estate and be subject to the control of the executor or administrator, as the case may be, the proper designation is "the executors or administrators of the insured." If the policy involved is an endowment or a retirement income policy and the proceeds are to be paid to the insured if he or she survives to the date of maturity and to his or her estate if the insured does not survive, the proper designation is "insured, if living; otherwise to his or her executors or administrators." The simple designation "insured�s estate" is effective, but such terms as "heirs," "legal heirs," or "family" are not because when those terms are used, the proceeds do not become part of the probate estate. The appropriate intestate law is followed in determining the legal heirs, who receive the proceeds directly, being treated as named beneficiaries, rather than heirs. In other words, the proceeds pass outside the probate estate.

When the insured is the applicant and designates himself or herself as beneficiary, the insured can exercise all rights under the policy without the consent of any other person. The policy is the insured�s property and can be dealt with like any other property.

There are three general types of third-party beneficiaries:

When one person procures insurance on another person�s life and becomes the owner of the policy, he or she is known as the owner-applicant. Ordinarily the owner will designate himself or herself as beneficiary, although it is not inconceivable that he or she would direct that the proceeds be paid to someone else, particularly in the event that he or she predeceases the insured. This type of arrangement is typically used with key-man insurance and business-continuation agreements, but it is by no means confined to such situations. It may be used by a creditor to protect his or her interest or by a family group to provide estate liquidity and minimize death taxes.

From the standpoint of ownership rights, the third-party owner occupies the same position as the insured who designates himself or herself as beneficiary. There is a difference, but it is of no legal significance: The insured owns his or her policy because he or she is the only party involved, while a third-party owner has his or her rights established by an express provision in the contract. The third-party applicant, like every other applicant, must have an insurable interest in the insured at the inception of the contract. There need be no insurable interest at the date of the insured�s death; the third-party owner, or the beneficiary of his or her choice, is entitled to retain the full amount of the proceeds.

The second type of third-party beneficiary is the person who has furnished no consideration. Technically, this person is known as the donee or gratuitous beneficiary. In typical situations the insured designates a member of his or her family as beneficiary for no consideration other than "love and affection." It is not necessary for the donee beneficiary to have an insurable interest, although he or she usually does. Unless a specific notation is made to the contrary, the discussion in the succeeding pages is directed at the donee beneficiary.

The third type of third-party beneficiary is the person who has furnished a valuable consideration in exchange for the designation. A creditor may be designated as beneficiary under a policy on his or her debtor�s life, although it is much more common for the policy to be collaterally assigned to the creditor. In either event, the creditor is permitted to retain only that portion of the proceeds equal to his or her interest at the time of the debtor�s death. During the insured�s lifetime, the creditor can exercise no rights in the policy without the insured�s consent or joinder. Occasionally, a spouse is designated as beneficiary under a policy as part of a divorce settlement. The spouse�s rights in the policy proceeds depend on the terms of the settlement if the insurer has notice of the settlement. The designation is usually irrevocable or, if revocable, can be changed only by an appropriate court order.

Classified by identification, beneficiaries may be termed specific or class. A specific beneficiary is an individual who is designated by name or in any other manner that clearly sets him or her apart from any other individual. A class beneficiary is a person not mentioned by name who belongs to a clearly identifiable group of persons designated as beneficiaries.

In making specific designations, it is customary to identify the person both by name and relationship to the insured if there is a legal or blood relationship. For example, a son would be designated "Charles William Doe, son of the insured." A wife would be designated "Mary Smith Doe, wife of the insured." Preferably the full name�first name, middle name, and surname�should be given. If the designated beneficiary is the insured�s wife, her maiden name should also be included to prevent confusion and litigation in the event that there is be an antecedent or subsequent wife with the same first name. It invites litigation to designate the insured�s spouse simply as "husband" or "wife." If the insured has married more than once, there is likely to be controversy as to whether the designation refers to the person who was married to the insured at the time the designation was made or the spouse who was married to him or her at the time of the insured�s death.

The relationship accompanying the name in a beneficiary designation is regarded as descriptive only and not as a statement of entitlement. If a beneficiary is identifiable by name or otherwise, he or she is still entitled to the policy proceeds even though the stated relationship to the insured is no longer applicable�or never was. For example, if a man purchases a policy prior to his marriage and designates his fiancee by name as beneficiary, describing her as his wife, his death prior to their marriage does not deprive his fiancee of the policy proceeds. Nor does an invalid marriage have any effect on the beneficiary�s entitlement.

A class designation is appropriate whenever the insured desires that the proceeds be divided equally among the members of a particular group, the composition of which may not be definitely fixed at the time of designation. Examples of such groups are children, grandchildren, brothers, sisters, or heirs. Perhaps the most common class designation is "children of the insured." This type of class designation is especially favored for the designation of secondary or contingent beneficiaries. It may also be used in combination with a specific designation�for example, when the insured designates living children by name and then adds "and any other surviving children born of the marriage of the insured and John Doe, husband of the insured."

From the standpoint of the law, class designations are entirely proper. Courts have repeatedly sustained the validity of such designations. From a practical standpoint, however, class designations present the problem of identifying the members of the class. No class designation is entirely free of possible complications. Even the simplest designations can cause difficulties. For example, the designation "children of the insured" seems to circumscribe the class precisely enough to permit ready identification. In discharging its responsibilities under such a designation, however, the insurance company has to determine whether the insured was also survived by any illegitimate children, children by a previous marriage or marriages, or adopted children. If the surviving children are adults, there is always the possibility that one of them has severed normal ties with the family. His or her whereabouts may be unknown to the other members of the family and perhaps even his or her existence denied or concealed by them.

Even the designation "children born of the marriage of the insured and Mary Smith Doe, wife of the insured," while quite precise, does not indicate whether adopted children of the marriage should be accorded the same status as natural children. For the sake of clarity and to avoid possible litigation, therefore, some designations include a statement that the word "children" will be construed to include adopted children.

Similarly, the use of the term "heirs" in a beneficiary designation makes it necessary for the insurance company to refer to previous court rulings as to the meaning of the term in the jurisdiction involved or, lacking these, to seek court interpretation. The company will then have to identify and locate the heirs. The perils to the company are so great that many companies will not even accept the designation "heirs."

When either the insured or the insured�s spouse has children by a previous marriage, a class designation must be carefully worded to carry out the insured�s intentions. The insured may wish to provide for all his or her children and those of his or her spouse by the spouse�s former marriage, or the insured may want to confine his or her bounty to the children of the insured�s current marriage. If the insured specifies that the proceeds are to be paid to "my children" or "children of the insured," the insured�s children by any marriage would be included, but the children of the insured�s spouse by a previous marriage would be excluded. On the other hand, by speaking, for example, of "my wife, Mary Smith Doe, and our children," the insured is not only excluding his wife�s children by her former marriage but also any children he may have had by an earlier marriage and any he may have by a subsequent marriage.

Most companies today restrict the use of class designations. At best they lead to delays in settling death claims. At worst, they involve considerable trouble and expense for the company and possibly even multiple payment of some claims. Insurance companies, therefore, will not accept designations of a class whose relationship to the insured is remote or whose composition will be difficult of determination. Moreover, when the class is acceptable, it must be described as precisely as possible. All insurance companies, for example, permit the designation of children as a class. This protects the interests of unborn children. Otherwise, many children would be deprived of insurance protection through failure of the insured to revise his or her settlement plan after the birth of an additional child or children.

With respect to priority of entitlement, beneficiaries may be classified as primary and contingent. A primary beneficiary has the first claim to the insurance policy proceeds if the conditions on which they are payable are fulfilled. There may be two or more primary beneficiaries, in which event they will share the proceeds in the proportion specified by the insured. It is not implicit in such an arrangement that the beneficiaries share equally in the proceeds, except as to the members of a class. Class beneficiaries do share equally in the proceeds since, without mentioning names, it is impracticable to provide disproportionate shares. Any one of a group of primary beneficiaries, whether specifically named or designated as a class, therefore, enjoys rights in the policy equal to those of any other beneficiary.

The contingent beneficiary, frequently called the secondary beneficiary, has a claim to the proceeds that ripens only on the death or removal of the primary beneficiary. A contingent beneficiary is a person or organization that takes the place of the primary beneficiary if the primary beneficiary predeceases the insured or loses his or her entitlement in some other manner before receiving any proceeds. With the increased use of installment settlement plans, however, the contingent beneficiary has assumed importance in another roleÄÄnamely, to receive the benefits under an installment option payable beyond the death of the primary beneficiary. In this role, the contingent beneficiary can become entitled to benefits even though the primary beneficiary survives the insured. This function is important in connection with the interest option, installment time option, installment amount option, and guaranteed installments under life income options.

The two functions of the contingent beneficiary are quite distinctive, and his or her rights thereunder are quite different. Under the original concept, the contingent beneficiary becomes the primary beneficiary on the death of the primary beneficiary during the insured�s lifetime�subject, of course, to being divested of that position by the insured. The contingent beneficiary thus succeeds to all the rights of the original primary beneficiary, including those arising under the provisions for optional settlement. Upon the death of the insured, he or she is regarded as a "first taker" beneficiary, with all that this status implies under company settlement option practices. He or she might be given the right to take the proceeds in a lump sum, to elect a settlement option, or to designate contingent beneficiaries to receive any benefits unpaid at the time of his or her death.

At the death of the insured, proceeds payable in a lump sum vest immediately in the primary beneficiary (in the absence of a delay clause), and the interest of the contingent beneficiary or beneficiaries is terminated. If the primary beneficiary dies after the insured but before receiving a check from the insurance company, the proceeds go to the primary beneficiary�s estate, not to the contingent beneficiary. If the proceeds are payable under an installment option, the contingent beneficiary becomes entitled to the benefits at the primary beneficiary�s death. The contingent beneficiary is a "second taker" beneficiary, however, and under the practices of most companies has to take the proceeds under the distribution pattern prescribed for the primary beneficiary. In other words, a second taker contingent beneficiary is not usually permitted to commute the unpaid installments or to elect to have them paid out under a settlement arrangement different from that in effect for the primary beneficiary.

There may be, and usually are, two or more contingent beneficiaries. The typical insured designates his or her spouse as primary beneficiary and his or her children, by name or as a class, as contingent beneficiaries. For a lump-sum distribution, the designation might read, "Mary Smith Doe, wife of the insured, if she survives the insured; otherwise in equal shares to the surviving children of the insured." If the proceeds are to be distributed under an installment option, a more complex designation is necessary.

There may be various degrees of contingent beneficiaries, each successive level having a lower order of entitlement to the proceeds. Thus there may be first contingent, second contingent, and third contingent beneficiaries. Two levels of contingent beneficiaries are provided for in the following designation: "Mary Smith Doe, wife of the insured, if she survives the insured; otherwise in equal shares to the surviving children, if any, of the insured; otherwise to Harry Doe, father of the insured, if he survives the insured." If the proceeds are to be paid out under an installment option, the agreement usually specifies that any installments remaining unpaid at the death of the last surviving contingent beneficiary will be paid in a lump sum to that beneficiary�s estate. This obviates the necessity of reopening the insured�s estate to receive the unpaid installments, which�if one or two levels of contingent beneficiaries have died�might precipitate a series of estate reopenings, with considerable expense and little benefit. Many persons designate an educational institution, hospital, or religious organization as the last contingent or ultimate contingent beneficiary.

Under modern practice, the identification of a beneficiary in the policy application may be unilaterally changed by the policyowner. If so, the designation is referred to as revocable and the designee as the revocable beneficiary. In some situations, the beneficiary designation may be changed, but only with the beneficiary�s consent. If the insured does not have the unilateral right to change the beneficiary, the designation is properly described as irrevocable and the designee as the irrevocable beneficiary. This distinction is so significant that a word on the historical development of the concept of revocability seems warranted. Note, however, that the right to change the beneficiary must be included in the application or in the policy. Otherwise the initial designation is irrevocable.

Early life insurance contracts in the United States made no provision for a change of beneficiary. The insured simply entered into a contract with the insurance company that upon his or her death, the company would pay a specified sum of money to the person designated as beneficiary�usually the insured�s spouse. Since there were no surrender values or other prematurity rights of significance to the insured, the person entitled to receive the death proceeds was regarded to be the owner of the policy. One of the early students of American insurance law had the following to say about the interest of the beneficiary:

In 1888, the United States Supreme Court defined the interest of the beneficiary in substantially the same terms.

In consonance with this concept of policy ownership by the beneficiary, the majority of the early court decisions held that the death of the beneficiary before the insured did not terminate his or her interest. That is, the insured was not permitted to designate a substitute beneficiary; at his or her death, the proceeds were payable to the estate of the beneficiary originally named in the policy.

Around the turn of the century, some of the larger companies adopted the practice of including a provision in their policies that permitted the insured to substitute a new beneficiary even during the original beneficiary�s lifetime, provided the policyowner had specifically reserved the right. Moreover, the change could be effected without the consent of the beneficiary. There was some doubt as to the validity of this practice until the standard forms that grew out of the Armstrong investigation of 1905 and 1906 and became statutory (or compulsory) in New York on January 1, 1907, included a change of beneficiary clause. This clause was supplemented shortly thereafter by another that stipulated that the beneficiary�s interest, whether revocable or irrevocable, would terminate upon his or her death during the insured�s lifetime, with such interest reverting to the insured. The designation of a contingent beneficiary to succeed to the interest of a deceased primary beneficiary was the next logical development.

For some time after the validity of a reserved right to change the beneficiary had become well recognized, the revocable beneficiary was generally regarded to have a vested interest in the policy that could be defeated only by the exercise of the insured�s right to revoke the designation. This view became known as the defeasible vested interest concept. Under that concept it was believed that the beneficiary�s consent was necessary to the exercise of any policy rights by the insured other than the right to change the beneficiary. For example, the insured could not surrender or assign the policy, make a policy loan, or elect a settlement option without the consent of the beneficiary. Yet there was nothing to prevent the insured from revoking the beneficiary designation and then exercising the various policy rights and privileges.

During the last quarter century court after court has rejected the defeasible vested interest theory in favor of a more practical rule that considerably simplifies the administration of policy rights. The modern rule holds that a revocable beneficiary�s interest is at most a mere expectancy that is subject to every other interest created by the insured and to every policy right or privilege exercisable by the policyowner alone. Under this concept the beneficiary�s consent is not needed for the policyowner�s exercise of any policy right or privilege.

The interest of a revocable beneficiary, such as it is, terminates upon his or her death during the insured�s lifetime because of the reversionary clause referred to above. This is true even though there is no contingent beneficiary and the insured has failed to appoint a successor beneficiary. Thus the nature of the revocable beneficiary�s interest comes into sharper focus. A revocable beneficiary has no enforceable rights in the policy prior to maturity and cannot interfere in any way with the exercise by the insured of his or her rights in the policy. The revocable beneficiary has an "expectancy" in the proceeds that will materialize only if all of the following conditions are fulfilled:

Despite the fulfillment of these conditions, the beneficiary�s interest can be greatly impaired through policy loans negotiated by the insured.

On the positive side, the insured�s right to revoke a beneficiary designation is extinguished at the insured�s death, and the interest of the revocable beneficiary vests absolutely at that point. The beneficiary�s interest in the proceeds is, of course, subject to any operative deferred settlement agreement.

There are circumstances under which an insured who has reserved the right to change the beneficiary will not be permitted to exercise that right. This would be the case, for example, if the policy were subject to a collateral assignment agreement. Similarly, when a spouse is designated beneficiary of a policy under an agreement made in contemplation of divorce, or when�by court order�an insured is directed to designate his or her divorced spouse as beneficiary of a policy intended to serve as security for alimony payments or in lieu of such payments, the right to change the beneficiary is relinquished. In all such circumstances, the insurance company would permit a change of beneficiary if it had received no notice of the limitation on the insured�s right.

It is well settled that whenever the insured designates a particular person as the irrevocable beneficiary of a policy, the beneficiary acquires a vested interest in the contract. The exact nature of the interest depends on the terms of the contract.

At one time, an irrevocable beneficiary designation could equal co-ownership of the policy. If there were no conditions under which the beneficiary could be deprived of the right to receive the full amount of proceeds payable under the terms of the policy, that interest would be vested absolutely or unconditionally, and the beneficiary would be regarded as the sole owner of the policy. He or she could exercise all policy rights without the joinder of the insured and would even have the right to pay premiums to keep the policy in force. The insured would have no rights in the policy and, consequently, could do nothing with the contract without the beneficiary�s consent that would in any way diminish or adversely affect the beneficiary�s right to receive, at the insured�s death, the full amount of insurance provided by the policy. If the beneficiary predeceased the insured, his or her interest in the policy would become a part of the beneficiary�s estate, and his or her heirs would be entitled to the proceeds upon the policy�s maturity.

Such absolute vesting is not common in modern policies. Most policies today provide that the interest of a beneficiary, even one irrevocably designated, terminates if the beneficiary�s death occurs during the lifetime of the insured. In that event, all rights to the policy proceeds revert to the insured. This is sometimes called a reversionary irrevocable designation. Under this type of designation the interest of the irrevocable beneficiary is only conditionally vested. There is a condition�namely, the beneficiary�s death before maturity of the policy�that can destroy his or her interest.

Since the insured can reacquire ownership rights in the contract�s death benefit through the death of the beneficiary during his or her lifetime, the insured possesses a contingent interest in the policy�s death benefit from the beginning. Thus in the usual circumstances, neither the insured nor the irrevocable beneficiary can exercise any policy rights or dispose of the policy without the consent of the other. For all intents and purposes, the insured and the beneficiary are regarded as joint owners of the policy when the beneficiary designation is irrevocable.

It is possible for an insured to procure a policy under which he or she does not reserve the right to change the beneficiary but does retain all other normal policy privileges. In this case, even though the insured can diminish the beneficiary�s interest in such a policy or destroy it completely by surrender, the insured cannot revoke the beneficiary�s interest, such as it may be, and give it to another without the beneficiary�s consent. As courts have pointed out, the terms and conditions of the policy are determinative of the rights of the insured and the interest of the beneficiary. In the majority of policies issued today, however, there are no specific conditions that would permit the insured to impair or destroy the interest of an irrevocably designated beneficiary.

Irrevocable beneficiary designations are not widely used. An irrevocable beneficiary designation does offer the advantage of protecting the beneficiary�s interest in the proceeds during his or her lifetime and automatically vesting complete ownership rights in the insured in the event that he or she survives the beneficiary, but the same result can be achieved by an absolute assignment or an appropriately worded ownership clause.