Choosing a beneficiary for your life insurance policy is a decision that might not be as easy as you think. A beneficiary receives assets if you die while the policy is still active. But deciding who gets your money isn’t always just a matter of selecting a person. Your policy rules and state laws may affect or even restrict your choices. So, when deciding who your life insurance beneficiary should be, it’s important to make sure you are familiar with your policy and any regulations it’s subject to. Here are a few suggestions for determining how to select the right beneficiary.
When you purchase life insurance, you do it for a reason. Typically, a policy provides financial security for loved ones after a person dies, especially if the family relies on his or her income. But you may have another reason, such as a company or business that you want to make sure continues in your absence. You may want to ensure your funeral service is covered, or your debts can be paid off, so your family isn't stuck with the costs. Maybe you want to leave behind money for your child’s education or make sure the estate and inheritance taxes are covered on any assets your heirs receive. Whatever the reasons you have for purchasing life insurance, you’ll need to factor them in when choosing your beneficiary.
When you are choosing your beneficiary, remember you have more options than just someone in your immediate family. You can choose a single beneficiary or multiple recipients. Some examples of beneficiaries include:
Once you’ve figured out who you want as a beneficiary, be sure to get as much specific information about that person as possible – full name, Social Security number, date of birth, address, phone number, and the nature of the person’s relationship to you – so your life insurance company can easily locate him or her.
When you’ve decided on who will receive your assets, the next step is to figure out how they will be distributed. If you have multiple beneficiaries, it’s a good idea to seek help from legal counsel or a financial advisor with this process.
You should be prepared for the possibility that your primary beneficiary might die before you, can’t be located, or refuses the proceeds at the time of your death. By naming a secondary beneficiary you can ensure your assets pass directly to that person if need be.
Your life changes and so do the lives of your loved ones. Major events like marriage, having a child, getting a divorce, and death are just a few things that can affect who you might want as your beneficiaries. It’s a good idea to review your beneficiary designations on your life insurance policy every year or so to make sure you’ve selected the right person or persons to inherit your assets. If you don’t keep your beneficiaries up-to-date you may risk leaving your money to someone who died or someone you don’t want to have your money, like an ex-spouse.
Naming your children as life insurance beneficiaries seems like a natural choice, but it isn’t necessarily the smart one. If you die while your kids are still minors, they may not be eligible to receive the funds until they reach the age of 18. This delay can be detrimental if they need your death benefit for living expenses. There are a couple of ways to ensure your children can have immediate access to your assets:
Appoint a guardian
Legal guardians are allowed by many states to receive a death benefit on behalf of minors. You can appoint a legal guardian while you’re alive and the state must grant him or her the legal rights to manage the child’s finances. Appointing a guardian can be expensive and might take a while, so talk to a lawyer before you start the process.
Establish a trust
Trusts are a good solution for leaving money to your children. You can set up a life insurance trust and name a trustee to oversee the funds and distribute the money to your children, or whomever you wish. There are costs involved with setting up a trust.
Wills work alongside your life insurance policy. You can’t use your will to modify your life insurance policy, so if you named someone as a beneficiary of your life insurance, that person will receive your death benefit. To ensure your wishes are honored, make sure your will matches your life insurance policy. Your life insurance beneficiary designations will supersede the will in almost every case because it is a contract.
Your state may have laws about beneficiaries that you aren’t familiar with. For example, in some states, like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin have community property laws, and three other states — Alaska, South Dakota, and Tennessee — have elective community property laws. These laws give couples equal ownership of their joint property. If you want to designate someone besides your spouse as a beneficiary, your wife or husband will need to sign a waiver. Make sure you research the laws in your state or talk to a financial advisor about the rules your beneficiary choices may be subject to.
If you don’t name a beneficiary, your life insurance death benefit may go to your spouse. Policies vary, however, and there could be a specific order of distribution in your plan should you leave the beneficiary box blank. There’s a good chance your insurer could issue the death benefit to your estate and a court will decide how to handle the funds. It could take time for the money to be distributed to those you love who need it. The process can also be expensive, and the cost would come out of your funds.