If you die while your life insurance policy is still in effect, the death benefit will go to the beneficiary. This indicates that selecting a beneficiary is one of the most significant steps in purchasing a life insurance policy.
The decision of who will receive the payoff may not be as straightforward as you believe. Local regulations and policy guidelines may impact or even limit your options.
Who is eligible to be a beneficiary on a life insurance policy?
Beneficiaries of life insurance policies might come from individuals, organizations, or trusts. The following are some common examples of people who benefit from life insurance:
● A person, like your spouse
● Multiple people, like your children
● A trust
● Your estate
● An organization dedicated to charity work
● A legitimate entity, such as your own business
Types of Life Insurance Beneficiaries
Some insurance companies cap the number of beneficiaries you can specify. However, some common types of beneficiaries include:
● Primary or secondary beneficiary
● Multiple beneficiaries
● Revocable or irrevocable beneficiary
Primary or Secondary beneficiary
Primary life insurance beneficiaries are those people who stand to benefit the most from your policy. Beneficiaries of contingent life insurance, also known as secondary beneficiaries, are eligible to collect the death benefit if the primary beneficiary passes away before the policyholder.
Multiple beneficiaries
You must decide how much of the payout will go to each party if you identify several beneficiaries. These beneficiaries can be primary or contingent.
No matter how you decide to distribute the proceeds of a life insurance payout among the beneficiaries, the total of all of the percentages must equal one hundred per cent. If you don't indicate the percentages, the insurance might divide the benefit between all beneficiaries equally.
Irrevocable vs. revocable beneficiaries
Without the beneficiary's consent, you cannot make changes to the beneficiary designation on an irrevocable life insurance policy. Because of this factor, irreversible designations are not as standard as they once were.
On the other hand, they can be helpful if you want to ensure that a particular person would receive the death benefit when you pass away.
In contrast, a beneficiary designation on a revocable life insurance policy provides more leeway. Any revocable beneficiary can have their information changed, updated, added to, or removed at any time.
This gives you the flexibility to change your designation by your evolving requirements.
Choosing a beneficiary for your life insurance policy
This is not always a straightforward choice to make. It's possible that the obvious choice isn't the one that will lead to the best outcome. To begin, you should inquire as to the reasons behind 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 were to pass away?
● Who would need financial assistance to cover the costs incurred with your passing?
● What or who would you wish to benefit from the financial resources you leave behind?
By being as specific as you can when naming a beneficiary for your life insurance policy, you can reduce the likelihood of making common errors. If you write "spouse" or "kid," the insurer may not be sure who should receive the payments.
However, if you write "parent," the insurer will be sure who should receive the funds.
Make sure to include any identifying information, such as the beneficiary's full name, their Social Security number, the nature of their relationship to you, their date of birth, and their address, so that the insurer can promptly discover your beneficiaries.
To ensure that you are using the appropriate terminology, you should seek the advice of a legal practitioner.
When you have whittled down your choices, the next step is determining how much money each beneficiary would require. Then divide the death benefit by that amount.
Having children listed as beneficiaries of your estate
The decision to list your children as beneficiaries on your life insurance policy may appear reasonable. If you die while they are still minors, it is possible that they will not receive the cash.
However, once they reach the "age of majority," typically 18 years old, they can get it. If your child needs
the death benefit to fund immediate living expenses, a delay might be extremely frustrating.
There are ways to get around this problem and guarantee that your children will have access to the death benefit even before they reach the age of majority, including the following:
Choosing your estate as the beneficiary of your account
Even though the proceeds from a life insurance policy are not usually subject to taxation, the payout could be taxed as part of the estate if it is included in a substantial inheritance.
Even if you have a will, there is still a possibility that the court could hold up your estate. This will cause a delay in the payout and will cost your estate money.
Choose to designate a specific beneficiary on your life insurance policy rather than leaving the funds to be distributed according to the terms of your estate. The money will go straight to the beneficiary.
Before choosing your estate as a beneficiary, you should ensure that you have thought through all of the issues of inheritance and estate taxes. Naming your estate as a beneficiary is not always a bad idea.
Take Away
An essential component of having life insurance is the ability to select beneficiaries and to ensure that your selections are always accurate. Your initial decision may change if you get married, have children, adopt a child, or give birth to a child.
As new circumstances come up, you should make sure that you review your beneficiary designation to ensure that your choice is still acceptable.