A Comprehensive Guide for Life Insurance Beneficiaries

It's not always an easy choice, so here's how to choose the right beneficiary for your life insurance policy.

What is the definition of a life insurance beneficiary?

The death benefit is provided to your life insurance beneficiary if you die during your coverage. Choosing your recipient is a key step in the development of a life insurance policy. After all, the reason you carry life insurance in the first place is presumably your beneficiary. However, it may not be as straightforward as you believe to decide who will receive the payoff – State laws and policy restrictions can impact or restrict your decisions. Read the tiny print before you put the document, and learn how the beneficiaries are handled by your life insurance company.

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Who can be the beneficiary of a life insurance policy?

A life insurance beneficiary can be almost anyone, including individuals, corporations, and trusts. Here are some examples of common life insurance beneficiaries:

• A person, such as your spouse.

• Several people, such as your children.

• A belief.

• Your will and testament.

• A non-profit organisation.

• A legal entity, such as your business.

Some insurers limit the number of beneficiaries you can name. If your policy has a limit, be picky about who you include on your list.

Beneficiary (primary vs. contingent)

If you die, your primary life insurance beneficiaries will be the first to collect the death benefit.

If the primary beneficiary dies before you, contingent life insurance beneficiaries, also known as secondary beneficiaries, receive the death benefit. In some cases you can name a final life insurance recipient who receives the money if both the primary recipient and the contingent recipient pass before you.

There are several beneficiaries.

You can specify how much of the dividend each beneficiary receives if you designate numerous beneficiaries, whether primary or contingent. For example, if you name your spouse, child, and a local charity as principal beneficiaries, you may give 50% to your spouse, 30% to your child, and 20% to the charity. No matter how a life insurance payout is divided among beneficiaries, the percentages must sum up to 100 percent. If you do not specify the percentages, the insurer may give each beneficiary an equal share.

Irrevocable vs. revocable beneficiaries

Without the recipient's permission, you cannot amend an irrevocable life insurance beneficiary choice. As a result, irreversible designations are uncommon. They can, however, be handy if you want to ensure that a specific individual, such as your child, receives the death benefit.

On the other hand, a revocable designation of life insurance beneficiary is adaptive. A revoked beneficiary may at any moment be altered, modified, updated, added or deleted. This allows you to update your designation to fit your current requirements.

Choosing a Beneficiary for Life Insurance

This isn't always an easy choice. The best option may not be the most obvious. Begin by considering why you have life insurance in the first place:

• Who is financially dependent on you and would require assistance in paying ongoing bills if you died?

• Who would require financial assistance to cover costs incurred as a result of your death, such as funeral expenses?

• Who do you want to leave money to, whether they rely on you or not, such as a charity or a trust for your children?

By being as specific as possible when naming a life insurance beneficiary, you can prevent common blunders. If you write "spouse" or "kid," the insurance may be unsure who should receive the payments, particularly if you remarry or have many children.

Include any identifying information, such as each beneficiary's full name, Social Security number, relationship to you, date of birth, and address, so that the insurer can promptly discover your beneficiaries. Consult with a legal practitioner to ensure you're using the proper terminology.

After you've narrowed down your possibilities, calculate how much money each recipient will require and divide the death benefit proportionately.

Choosing children to be your beneficiaries

Naming your children as life insurance beneficiaries may appear to be a wise move. However, if you die while they are minors, they may not inherit the cash until they reach the "age of majority," which is normally 18. A delay can be aggravating, particularly if your child requires the death benefit to support immediate living expenses.

There are ways to avoid this problem and ensure that your children receive the death benefit without having to wait until they reach the age of majority:

Make a guardian appointment.

In several states, legal guardians can receive payments on behalf of minors. You can appoint a legal guardian before you die, or the guardian can apply for your rights after you die. In either situation, the guardian must be granted legal authority over the child's funds by the state. Appointing a guardian can be a time-consuming and costly process, so speak with a lawyer before continuing.

Create a bond of trust

Trusts can be an excellent way to leave money to children. You can create a life insurance trust for your children and have the trustee manage the funds and disburse the money according to your instructions. There are, however, expenses to consider, and the trust must be valid and functioning at the time of your death.

Designating your estate as a beneficiary

Although life insurance proceeds are generally not taxable, the payout may be liable to estate tax if it is bequeathed as part of a big inheritance. Even if you have a will, your estate, including the death benefit, might be held up in probate court, causing the distribution to be delayed and costing your estate money. Instead, if you name a specific beneficiary on your life insurance policy, the monies go straight to the beneficiary rather than being included in your estate.

Naming your estate as a beneficiary isn't always a bad idea, but make sure you evaluate all of the estate tax and inheritance ramifications before making the decision.

What if you don't designate a beneficiary?

If you do not name a beneficiary, the death benefit is usually paid to your estate. However, in some situations, insurers distribute the death benefit in the sequence specified in the policy. This sequence is subject to change, so be sure you know who is first in line before leaving the beneficiary box blank.

The states that have community property

If you live in a community property state, where you and your spouse are equal owners of all your joint assets, your life insurance payout may go to your spouse automatically, regardless of whether you choose a beneficiary. In order to prevent this, your wife must provide the designated beneficiary formal approval before you die.

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin all have community property laws. Other states with elective community property laws include Alaska, South Dakota, and Tennessee, where married couples can opt to have equal ownership of their joint property. As a result, if you elected to follow community property rules when you married, your spouse must approve to the beneficiaries on your life insurance policy.

Beneficiaries can be changed, added, or removed.

Revocable life insurance beneficiaries can usually be changed, added, or removed at any time. The methods used by insurers differ. Some businesses may require a change of beneficiary form to be signed by a witness, but others allow you to update your beneficiary online.

When should you alter the beneficiary on your life insurance policy?

After big life changes, it is critical to examine your life insurance beneficiaries to ensure that the correct people are protected. Here are several scenarios that may cause you to reconsider your prior choices:

• You marry and wish to name your new spouse as a beneficiary on your will.

• You divorce and wish to remove your ex-spouse from the insurance and replace them with a child, trust, or close family member.

• You have children and would like to include them on your list of beneficiaries.

• Your children are no longer financially dependent on you, and you wish to alter their percentages or appoint a spouse in their place.

• Your beneficiary passes away, and you want to revise or modify your selection.

Encourage your beneficiaries to learn how to file a life insurance claim so that they will be better prepared if you pass away. Because not all states require insurers to notify beneficiaries of a death, beneficiaries may have to contact the insurance provider directly. The National Association of Insurance Commissioners (NAIC) provides a policy locator service to assist beneficiaries in locating unclaimed policies.