Life insurance is one of the most reliable ways to ensure that your loved ones are financially protected after you’re gone. Choosing the right beneficiaries for your life insurance can seem uncomfortable, but it’s a crucial part of finalizing your policy. This guide will walk you through the important details about life insurance beneficiaries, rules, and how to make informed decisions when naming them.
What Is a Life Insurance Beneficiary?
A life insurance beneficiary is the individual or entity that receives the death benefit from a life insurance policy when the policyholder passes away. Beneficiaries can include people, multiple individuals, or even organizations, depending on what the policyholder specifies. Once you pass away, your insurance provider will directly pay out the benefits to those you’ve designated as beneficiaries.
Life insurance is designed to provide a financial cushion for your family and loved ones after your death. While you can surrender your policy for less than its face value, the main purpose is to provide financial assistance to your beneficiaries, not the policyholder.
Life Insurance vs. Will Beneficiaries
While life insurance and wills both deal with the distribution of assets after death, they differ in important ways. Life insurance beneficiaries are entitled to a payout as long as the policyholder is current on their premiums. The death benefit is usually paid in a lump sum, but it can also be divided into installments. This payout process doesn’t depend on the probate process.
On the other hand, a will requires the assets to go through probate before they’re distributed to the beneficiaries, which can cause delays. A will does not override a life insurance policy, meaning that life insurance beneficiaries will receive their payout regardless of what the will says.
Primary vs. Contingent Beneficiaries
You have the option to designate more than one beneficiary for your policy. There are two types: primary and contingent.
- Primary Beneficiary: This is the person who will receive the death benefit first. If they are alive when the policyholder passes, they get the payout.
- Contingent Beneficiary: A contingent beneficiary is like a backup. If the primary beneficiary has already passed away by the time the policyholder dies, the contingent beneficiary will receive the benefit.
If you’re naming multiple primary beneficiaries, you can choose to split the death benefit in equal portions or assign different percentages to each. There are two ways to divide the benefits:
- Per Stirpes: This option ensures that the children of a deceased primary beneficiary will inherit their share. For example, if one of your primary beneficiaries passes away, their children would receive their portion.
- Per Capita: In this case, if one primary beneficiary passes away, their share would be distributed among the remaining primary beneficiaries, rather than their children.
Who Can Be a Life Insurance Beneficiary?
Life insurance policyholders have flexibility when choosing beneficiaries. They can name practically anyone, but there are a few things to consider:
- Spouse: It’s common for people to name their spouse as the primary beneficiary. However, if you live in a community property state, your spouse may have to approve other primary beneficiaries.
- Family Members: You can name family members like children, parents, or siblings. Consider any individuals who might be financially dependent on you or would need help after your death.
- Friends: You can also name friends, but you should be prepared to update your policy if the relationship changes.
- Minors: If you want to designate a minor as a beneficiary, you’ll likely need to appoint a guardian to handle the funds on their behalf.
- Financial Relationships: Some people name individuals like co-signers or business partners to ensure their financial obligations are met.
- Charities or Trusts: You can also name a charity, nonprofit organization, or trust as a beneficiary, and the funds will be used as per your instructions.
How to Designate a Beneficiary
To designate a beneficiary, you’ll fill out a beneficiary form when you purchase your life insurance. This document informs the insurer who should receive the death benefits upon your passing. Be as specific as possible with the details, such as full names, addresses, and social security numbers to avoid confusion. If you wish to split the benefits, clearly state the percentage for each beneficiary.
It’s also a good idea to notify your beneficiaries, so they know what to expect. Providing them with a copy of your policy allows them to contact the insurance provider for updates after your death.
When naming beneficiaries, you’ll have the option to choose whether each one is revocable or irrevocable. A revocable beneficiary can be changed at any time without their consent, while an irrevocable beneficiary cannot be removed or altered without their permission.
Tips for Choosing a Beneficiary
Choosing a beneficiary may be difficult, especially if many people are financially dependent on you. Here are some tips to help you make the right decision:
- Consider Multiple Beneficiaries: It’s common to name more than one beneficiary, especially if you have a family or dependents. In some cases, you might want to divide the benefit between your spouse and children or others who rely on you financially.
- Plan for Minors: If you want to name a minor as a beneficiary, set up a trust or designate a legal guardian to ensure the funds are handled properly.
- Long-Term Dependents: For individuals who require lifelong financial support, such as someone with special needs, be cautious. Naming them directly as a beneficiary could affect their eligibility for government assistance. A special needs trust can help avoid this issue.
- Use Percentages Instead of Dollar Amounts: Policies can change in value over time, so using percentages ensures each beneficiary receives the correct share, regardless of the policy’s current value.
- Review and Update Regularly: Life circumstances change, so it’s important to review your beneficiary designations periodically. If something changes in your life, such as a divorce or the birth of a child, be sure to update your beneficiaries accordingly.
What Happens If You Don’t Name a Beneficiary?
If you don’t designate a beneficiary, the death benefit will usually go to your estate. This means the money will be subject to probate, a lengthy legal process that can delay the distribution of funds. The court will decide how to distribute the assets based on your estate plan, if one exists, and your family will likely have to wait several months to receive anything.
Conclusion
Naming life insurance beneficiaries is an important task that ensures your loved ones are cared for after you’re gone. Be sure to choose carefully, considering all aspects of your financial relationships. Keep your beneficiary information up to date and consult with a professional to make sure you’re making the best decisions for your future and the future of those who depend on you.
