There are four main parties to every life insurance contract: the life insured, the policy owner (could be the same person as the life insured), the beneficiary and the insurance company. As part of the application process, the owner of the policy sets up one or several beneficiaries. The beneficiary(ies) will receive the proceeds or death benefit should the life insured die while the policy is in place.
The beneficiary(ies) can be changed at any time, provided that they are not set up as an “Irrevocable Beneficiary”; in which case, you would need their written consent to remove them as beneficiary or make any changes to the actual policy terms like borrowing or withdrawing money, or assigning the policy as collateral with a bank. It is wise to set up a contingent beneficiary, for the unforeseen circumstance where the life insured and the beneficiary were to die at or around the same time (could be two spouses passing in a car accident).
Sometimes, a beneficiary may die first, and if the advisor is not aware of this fact, the policy may not get updated to designate a new beneficiary. If there is no surviving beneficiary(ies), the death benefit is then paid into the estate,which means it has to go through probate,which often can take months to be processed and also make it susceptible to additional taxes.
There can be any number of people or businesses or even charities named as a beneficiary. If the beneficiary is a charity (and is set irrevocably), the premiums are then tax deductible to the policy owner as a charitable donation. In most cases, if you wish to take advantage of the potential creditor protection, you should look into designating a direct family member (parent, spouse, child or grandchild) as beneficiary.
Note that if the beneficiary is a corporation, then the death benefit is not protected from creditors in the case of bankruptcy. Please be aware that this creditor protection has been challenged and any amounts deposited within 12 months of a creditor claim may not be protected. In setting a child or grandchild as beneficiary, it will allow you an opportunity to transfer your wealth down the generations tax free (see Cascading Life Insurance).
Be sure to give careful thought to who you set as a beneficiary in your policy.