The purpose of a life insurance policy is to provide your family or the organization of your choice with financial support after you pass away. A life insurance beneficiary is the person who gets the death benefit from your insurance policy after your death. If you want to choose a beneficiary for a life insurance policy but don’t know how to do so, then don’t fret because this write-up will show you how to.
What Is a Life Insurance Beneficiary?
A life insurance beneficiary is someone you choose to receive the death benefit from your life insurance policy when you die. The beneficiary will receive the death benefit from the insurance company. A life insurance policy is a contract between the policyholder and the insurance company. The insurer is compelled to follow the contract.
The payout will be given to the beneficiary named on the life insurance policy. This is why choosing a beneficiary for your life insurance policy is very important. You can decide to choose more than one beneficiary and also choose how much death benefit goes to each beneficiary. Life insurance beneficiaries are of two types: a primary beneficiary and a contingent beneficiary.
- Primary Beneficiary: This is the person who receives any death benefits when the policyholder passes away. You can choose to have several primary beneficiaries who will receive a percentage of your death benefits.
- Contingent Beneficiary: This beneficiary receives your death benefits if the primary beneficiary passes away before the death benefits are disbursed. The contingent beneficiary will get the death benefit if the primary beneficiary isn’t found.
There are not many rules regarding who you can select as your beneficiary. Most policyholders often choose elderly parents, spouses, or children as their beneficiaries. However, you can also choose a church or a charity to receive your death benefit.
How to Choose a Life Insurance Beneficiary
Choosing a life insurance beneficiary is a crucial decision that requires careful consideration. Here are some steps to help you make the right choice:
• Understand Your Options
Life insurance allows you to designate one or more beneficiaries to receive the policy proceeds upon your death. Your options typically include individuals, such as family members or friends, or entities, such as trusts or charities.
• Assess Your Relationships
Consider the people who are most financially dependent on you or who would face the greatest financial hardship in the event of your death. This often includes spouses, children, or other dependents.
• Consider Financial Needs
Evaluate the financial needs of your potential beneficiaries. Consider factors such as outstanding debts, mortgage payments, educational expenses, and ongoing living expenses.
• Review Your Estate Plan
If you have an estate plan in place, ensure that your life insurance beneficiary designations align with your overall estate planning goals. Coordination between your life insurance policy and your will or trust can help avoid conflicts and ensure your wishes are carried out.
• Name Contingent Beneficiaries
In case your primary beneficiary predeceases you or is unable to receive the proceeds for any reason, consider naming contingent beneficiaries. This ensures that the proceeds go to someone you choose if the primary beneficiary is unavailable.
• Consult with Professionals
If you have complex financial or familial situations, consider consulting with an estate planning attorney or financial advisor. They can provide personalized guidance based on your specific circumstances and goals.
• Keep Your Designations Updated
Life changes such as marriage, divorce, the birth of children, or the death of a beneficiary may necessitate updating your beneficiary designations. Regularly review your policy and make any necessary changes to ensure your wishes are reflected accurately.
• Document Your Decision
Once you’ve made your decision, be sure to document your beneficiary designations clearly within your life insurance policy and any accompanying paperwork. This helps to avoid confusion and ensures that your wishes are honored.
By carefully considering these factors and seeking professional guidance when needed, you can choose a life insurance beneficiary with confidence, knowing that you’ve made a decision that aligns with your financial goals and obligations.
FAQs
When Should I Change, Add, or Remove Beneficiaries?
It is an excellent idea to check your life insurance beneficiaries once every year to ensure that you are still satisfied with who you have listed as your beneficiaries. Some of the instances that might cause you to change your beneficiaries include marriage, divorce, or the death of a loved one.
While a life insurance policy is a legal contract, it is essential to remember that it is not permanent. It is a living document while the policyholder is alive, and the beneficiaries are usually changed at any time with either a request form or online.
Who Can Be a Life Insurance Beneficiary?
You can choose anyone as a beneficiary of a life insurance policy. You can choose your family member, a charitable organization, friends, children, or guardians of your children. Naming your spouse as your primary beneficiary is demanded by several states’ laws.
Your spouse is entitled to 50% of the death benefit. Some states enable you to name someone other than your significant other as a beneficiary if you have documented permission from your spouse.
What to Consider When Choosing Your Beneficiary?
The very first thing to consider when you are choosing your beneficiary is the age of the person. If the beneficiary is a minor, there are a few steps you might need to take to comply with your insurance beneficiary rules. You must be able to name a guardian to manage the money until the minor is of age to receive the death benefit. It is preferable to choose a guardian that you trust enough to manage the money you left for your kids.
If the beneficiary is disabled, you might want to create a special needs trust. Through this, the beneficiary will be able to receive the death benefit without losing government assistance. If you also live in a community property state, then you will need your significant other to sign a form that waives their rights to your death benefits.
In a community property state, both couples equally own any income made during the duration of the marriage and other property that may have been bought with the income.
If you get married again and have children from your old marriage, you might want to consider how you will split the life insurance benefits. You can contact your financial advisor to help you decide who needs your death benefit.
