Picking the Right Beneficiary for Your Life Insurance

When life insurance consumers set up life insurance policies, they will be asked to assign a beneficiary to receive the payout of the policy in the event of the policy holder’s death.  The beneficiary can be an entity, trust, or a person designated to receive all or a portion of the assets of the account when the policy holder dies. In case of the death of the primary beneficiary, it is possible to set up a secondary beneficiary for the account holdings also known as a contingent beneficiary.                                                                      

While some people feel that simply naming their beneficiaries in their will is sufficient, it is important to know that is not the case. Beneficiaries named on the life insurance policy itself are the ones who will receive the payment.  Also needed is detailed information naming the beneficiary by name, address, phone number, email, date of birth, and Social Security number on the life insurance policy. Otherwise, it is not guaranteed that the proceeds will go to your preferred beneficiary.  A charity, a trust, or an estate could also be named as the beneficiary.              

Is a Primary Beneficiary Sufficient?                                                                                                                          

In a word, no. If the primary beneficiary dies, insurance holders will need to change the beneficiary on a policy and select another person or entity to receive the payout. It is also wise to have a contingent beneficiary in place in the event the designated primary beneficiary dies at the same time as the policy holder. This ensures there is a beneficiary in place to receive the funds.  For instance, it is most common for a spouse to be named as beneficiary, but it is wise to place your child or children as contingent beneficiaries in the event of the spouse’s death. More than one primary or contingent beneficiary can be named by assigning percentages to the payout amount for each beneficiary. It is possible that the payout will go to the primary beneficiary’s estate in the event of their death instead of the contingent beneficiary.    It is wise to know the conditions of the policy if this will be the case for your particular life insurance policy.                                                         

It is important to note a minor child cannot accept the gift until they reach the age of 18 or 21, depending on the state in which you reside. You can, however, assign the beneficiary as a trust and designate when the child receives that money from the conditions of the trust account.  A guardian can also be assigned as a beneficiary of the account to oversee the funds on behalf of a minor until the minor reaches the appropriate age.

If your desired beneficiary receives government assistance, it’s wise to consider setting up the beneficiary as a legal guardian or a trust fund to prevent disqualifying the beneficiary from further financial assistance.  

What is the Purpose of your Policy?

As you set up your policy, keep in mind the reason behind setting up the policy in the first place. For instance, who do you want to support in your absence? Do you want it to be used to pay off a business debt or personal debt such as a mortgage? Once you know your goal for your policy, it is then time to consider your options. 

For many families, a trust is a good choice for designating funds to minor children as mentioned previously. The insurance would send a check to the trust, and a trust manager would pay the children as you had instructed. Thus, your children would be financially cared for in your absence.                                  

If your family is already cared for financially, you may want to consider donating to a charity and creating a legacy following your death. There are many worthy charities, although you may have one close to your heart that helped you at some point in your life. This option allows you to give back, and in doing so, express gratitude.             

I’ve Set Up My Policy, What Now?     

Once your policy is in place, it’s still important to review it often and update it as needed. If your primary or contingent beneficiary is deceased, you will want to change your policy to add another beneficiary. If your beneficiaries are your children or grandchildren and they’re listed by name, you will need to update the policy upon the birth of additional children or grandchildren.                                                                           

Last but not least, ensure that your life insurance policy stipulations match that of your will. In the event the two documents do not match, the policy stipulations will trump that of the will. So once again, having an updated beneficiary list on your life insurance policy is very important.   Some people simply rely on their knowledgeable insurance adjustor to answer any questions regarding a policy at any time.    

Leave a Reply