Life insurance works by paying a sum of money to a designated beneficiary when the policy owner dies. Thus, purchasing a life insurance policy is a way to provide for loved ones financially when you’re no longer with them. Choosing a life insurance beneficiary can be a critical piece of estate planning, and the following article will provide information and guidelines to help you make that decision.

What Is A Beneficiary?

A life insurance beneficiary is the person, people, organization, or trust that will receive the cash payout when you die.  While it’s a fairly common practice to select a single beneficiary, you can choose more than one and assign each a percentage of the payout. In addition, it is always a good idea to designate both a primary and contingent beneficiary.

Primary Beneficiaries

The primary beneficiary is the individual (or individuals) you choose to receive your life insurance benefits. A primary beneficiary can also be a business or an organization. If you don’t designate a primary beneficiary, then the insurance benefits will be paid to your estate, and the court will determine who should receive them.

Contingent Beneficiaries

A contingent beneficiary is someone who is in line to receive your insurance payout if the primary beneficiary has died or can’t be found. If the primary beneficiary is able to receive the payout, then the contingent will not receive anything. You can name multiple contingent beneficiaries, each one next in line if the previous contingent is not available.

Who Can Be A Beneficiary?

You can choose any person or organization as your life insurance beneficiary. By far the most common choice is a spouse or child, but you can also choose a friend, a business, a church, or another non-profit organization. You can even make a pet your beneficiary if you set up a trust account and designate a trustee to manage it. The following are some things to know about these options.

Spouse As Beneficiary

A spouse is a very common choice of beneficiary. Most people want to know that their husband or wife will be okay and be able to keep providing for their children. When naming a spouse as beneficiary, it’s important to use the person’s name, not “wife” or “husband.” That’s because in the case of divorce and remarriage, both the current and ex-spouse will have a legitimate claim to the benefits. It’s important to note here that some states have community property laws stating that only a spouse can be a life insurance beneficiary.

Child As Beneficiary

In the case of a minor child, it’s necessary to set up a trust account and trustee rather than having the money paid directly to the child. With a trust account, a custodian that you name will control the funds until the child has reached the age of majority or, in some states, turns 21. There are laws regulating what trust funds can be used for, but in general, the funds can be used for educational expenses and other expenses that benefit the child.

Friend As Beneficiary

A life insurance beneficiary doesn’t have to be a family member, as long as you are not married and living in a community property state. Single people often choose non-family members as beneficiaries. Some people choose a close friend or someone who has provided care during an illness. Some people choose a friend who needs money as a way of offering the kind of help they can’t afford to give during life.

Organization As Beneficiary

A beneficiary doesn’t have to be a person; it can also be an organization. This is a common choice when family members are wealthy enough that they don’t really need the life insurance benefits. For example, if you own a business, you might choose to have the business itself receive your benefits in order to offset the cost of your absence. If you’re a member of a church, you might want to leave a legacy to the congregation by naming the church as your life insurance beneficiary. You can also choose any non-profit organization, like a charity that you support.

Trust As Beneficiary

If you want your insurance payout to benefit anyone who can’t be designated as a beneficiary, such as a minor child or a person with a cognitive disability, then you can have your insurance company pay your benefit into a trust fund. To set up a trust fund, you’ll need to name a custodian who will be responsible for managing the funds and spending the money as you intend.

If you get divorced or if other factors affect your choice of beneficiary, you can always make changes. As long as the beneficiaries you name are not irrevocable, you can update your choices simply by contacting your life insurance company.

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