One of the reasons you might purchase a life insurance policy is to provide for your family if you pass away unexpectedly. Life insurance policies allow you to leave your family with financial support and security. When you buy a life insurance policy, you will get to choose a beneficiary.
A beneficiary is someone who receives the monies from your life insurance policy when you die. A beneficiary doesn’t have to be a person, however. You can name an organization or board of trustees as beneficiaries. Either way, a life insurance beneficiary inherits the death benefit. For example, if your life insurance policy includes a $100,000 death benefit, and you named your spouse as your beneficiary, your spouse would receive $100,000 as the life insurance beneficiary.
Some common beneficiaries include:
It’s very common to have multiple beneficiaries. Many people want to support their families, contribute to their desired charities or churches, and help their other loved ones. When this is the case, naming multiple beneficiaries can be the best way to provide for all of your loved ones. The key with multiple beneficiaries is to establish exactly how much, or what percentage, each beneficiary receives and who the contingent beneficiaries are.
There are two main types of beneficiaries for both wills and life insurance, and there are two ways that benefits can be disbursed to the beneficiaries.
A primary life insurance beneficiary is who you choose to receive your death benefit. A contingent beneficiary is like a backup beneficiary. If the primary beneficiary is deceased, the contingent beneficiary becomes the primary beneficiary.
There are two ways you can set up life insurance beneficiaries:
You can also designate beneficiaries to be revocable or irrevocable. When you have revocable beneficiaries, you’re able to add and remove people or organizations from your list of beneficiaries without their permission. For example, you could remove a partner as a beneficiary if you no longer want to leave money to them. Or you could add a co-beneficiary without the permission of the other primary beneficiary.
With an irrevocable beneficiary, it is not possible to remove them as the beneficiary on a life insurance policy without their permission. You also aren’t able to name additional beneficiaries without permission from an irrevocable beneficiary because this could change the benefits the irrevocable beneficiary would receive.
The most important consideration when choosing a beneficiary is determining who depends on you financially. Most often, the people who depend on you financially are your immediate family members, like your spouse or children. In this situation, you may name your spouse as the primary beneficiary and then together decide on contingent beneficiaries.
But your immediate family might not be the only ones who depend on you financially. If you help support your parents, you’ll want to consider how you can continue to support them. If you help pay for a family member’s college tuition or make regular contributions to a church or charity, you may also want to consider how you can continue to support these people and organizations. Once you’ve determined who or what you want to support financially, you’ll know who your beneficiaries should be.
After deciding on beneficiaries, you’ll want to establish how much each beneficiary will receive. It’s often better to make these designations using percentages rather than exact dollar amounts because assets, or a death benefit, can continue to grow in worth (or decrease) during your life.
Almost anyone or any organization can be a life insurance beneficiary, but there are some potential downsides to consider when choosing beneficiaries:
In the case of a life insurance death benefit, there are some situations where the beneficiaries might be denied the money:
Generally, life insurance claims are a simple process and are paid within a few days. If you’re named as someone’s beneficiary on a life insurance policy, what can you expect to occur after that person dies?
Here’s a high-level overview:
In summary, having your beneficiaries set up correctly is extremely important. When someone gets a new policy they will usually set up the beneficiaries the way they want them. But something many people fail to do is to make updates as life changes. We believe it’s important to periodically review and adjust beneficiaries if necessary, and we can help our clients make adjustments along the way. Schedule an appointment with us if you need to add, review, or update your life insurance beneficiaries.