Why can't I list anyone I want as  beneficiary?

In order for someone to qualify as your beneficiary, they must be expected to suffer financial—not just emotional—loss as a result of your death.  This relationship is called an "insurable interest."

Can you imagine if everybody in the country took out a life insurance policy on a universally-loved celebrity?  That would not be insurance so much as profiting from a stranger's death.

A financial loss does not only arise from the loss of a wage-earner, however.  For example, the death of a stay-at-home parent may oblige the surviving family members to hire an au pair and/or housekeeper.  The loss of a stay-at-home parent's contribution represents a financial loss which corresponds to the family's new expense.

An insurable interest needs to exist at the time the life insurance policy is purchased, but it does not need to exist at the time the death benefit is issued.  If the beneficiary's insurable interest terminates after the policy goes in force, he or she is still a valid beneficiary for as long as the policy remains in force.

In fact, in the event that ownership of a life insurance policy changes hands, the new owner may never have had any insurable interest in the insured party.  This makes it possible for life insurance owners to actually sell their permanent policies in the event that they become hard-pressed for cash.

Common choices for beneficiaries are a spouse, offspring, trust, or business partner.