Tips for choosing a life insurance beneficiary

The decision to purchase life insurance is often driven by the desire to provide benefits to the people in your life, a business, or another entity. Choosing your policy’s beneficiary is an important step in the life insurance process. Before making your selection, consider policy rules and state laws.

Frequently asked questions about life insurance beneficiaries

Suppose a person or entity doesn’t immediately come to mind when considering who to designate as a beneficiary. In that case, several guidelines and questions regarding beneficiaries help you make this important decision.

What is the purpose of my policy?

People buy life insurance for a variety of reasons, including helping to cover funeral expenses, paying off debt, financially protecting loved ones, or leaving money to a company or business so they can continue in their absence. A person may also wish to leave money for a child’s education or make sure any applicable inheritance and estate taxes are covered on any assets their heirs receive. When choosing a beneficiary, think about the goals you would like to accomplish with your policy.

What are my options for a beneficiary?

When selecting a beneficiary, there are some other options beyond immediate family members. Additional examples of beneficiaries include:

•  A single person
•  Two or more people
•  A non-profit group or charity
•  An estate
•  A trust that has been established

The life insurance company will request certain details regarding a chosen beneficiary, including full name, Social Security number or tax ID number, date of birth, address, phone number, and the nature of the person’s relationship to the insured.

Can I have more than one beneficiary?

Designating more than one beneficiary on a life insurance policy can be an option when someone wants to divide the death benefit between people or entities. For example, if two children are named beneficiaries, the death benefit may be split 50/50, or 75% of the payout could go to a spouse, and 25% could go to a child. If you wish to designate multiple beneficiaries, seeking help from legal counsel or a financial professional with the process can be helpful.

How do state laws affect my beneficiary choices?

Certain states may have laws about beneficiaries, so it’s a good idea to do some research or reach out to a financial professional for guidance. Some states, for example, require a spouse to be named as the primary beneficiary. If you wish to designate someone else, they might be required to sign a waiver to provide permission.

Should children be named as beneficiaries?

There are a couple of important things to consider when naming children as beneficiaries. If they are still minors when the insured passes away, they may not be eligible to receive the funds until they reach the age of majority. If they need the death benefit to help cover final expenses or other immediate costs, this delay could lead to unnecessary financial hardship. There are a couple of ways a person can ensure their children can receive immediate access to their assets:

Guardianship

If a minor is the beneficiary of a policy, a court-appointed legal guardian may be designated to oversee the death benefit. Since this process can often be lengthy and complex, a lawyer can help you navigate the steps to ensure everything is set up properly.

Establish a trust

For someone who wishes to leave money to their children, setting up a life insurance trust allows them to name a trustee who will oversee the funds and distribute the money to their children. Speaking with a lawyer can help assist with this process.

What happens if there is no beneficiary?

Most commonly, the death benefit is paid out to the estate if a life insurance policy has no beneficiary listed. However, most life insurance companies will not issue a policy without a named beneficiary. If all beneficiaries pass away before the insured, the insurance company may issue the death benefit to the estate, and a court will decide how to handle the funds.

When should I change beneficiaries?

As a person experiences life events like marriage, a new baby, or divorce, the need to review and revise beneficiaries may arise. If these events arise, a financial professional can help make any updates. They will also typically meet with you annually to review your policy to make sure your beneficiaries are up to date and your coverage amount still meets your needs.

What happens if my beneficiary dies before me?

A life insurance policy commonly asks the insured to name a secondary beneficiary, the person or organization that would be their second choice to receive the death benefit. If a primary beneficiary can’t be located, dies before the insured, or refuses the proceeds at the time of the insured’s death, then the death benefit will go to this designated person or entity.

Does my will override my life insurance policy?

In almost all cases, life insurance beneficiary designations may supersede a will. Since the death benefit is paid directly to beneficiaries, it doesn’t go through a will or the probate process. This is why having life insurance coverage can be a valuable way to support loved ones or a business financially. Reading a will can often take months, whereas life insurance claims are typically paid out once your beneficiary submits a claim.

How to designate a beneficiary

You likely have someone in mind when you decide to purchase life insurance. Whether it’s a loved one, a business, or a charity, benefits from a policy can have a lasting impact. Discuss your goals with your financial professional when purchasing coverage. Be sure to reach out following any important life events if you need to update your beneficiaries or have questions about how your circumstances could affect your coverage.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.

Neither North American nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

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