You buy life insurance because you love someone and want to make sure they’re protected financially if you were to die prematurely. So, getting coverage is paramount. But there’s another important step in the process that you need to pay close attention to: designating a beneficiary for your policy.
In simple terms, if you were to die, the person you select—the beneficiary—would get the life insurance proceeds, also known as the death benefit. In many cases, people name their spouse or partner as the beneficiary of their policy. This makes sense, as that’s the person who will be impacted the most financially if you were to die.
But every person’s situation is different, so there are many options for you to choose from. You may name more than one beneficiary, like having each of your children receive a portion of the proceeds. You can also name contingent beneficiaries, who would get the proceeds of the policy if your primary beneficiary is no longer living. Additionally, some people designate their favorite charity or organization as the beneficiary.
Here are a number of things to keep in mind when choosing a beneficiary:
A lot can change in a year and you want to be sure your policy’s beneficiaries are up to date – marriage, divorce, and/or birth of a child are some of the life events that can cause you to consider changing your beneficiaries. If any of the named beneficiaries pass away, you’ll want to update the policy right away.
Single parents may be tempted to do this, given that their children are the ones that would be financially impacted by their death. However, life insurance companies generally do not pay out a death benefit directly to children under the age of 18. A possible solution is to set-up a trust as the beneficiary of the policy, so that a trustee you appoint can manage the money for the children who are too young to receive the death benefit.
That may mean having a conversation with your insurance agent or even an attorney, if your situation is more complex. The last thing you’d want is for your life insurance proceeds to go to an unintended recipient or be stuck in legal limbo. For example, naming a new beneficiary for your insurance policy in your will can backfire. In most cases, companies will pay the beneficiary named on the policy, not the will.
As you can see, designating a beneficiary is one of the most important steps in getting your life insurance coverage in place. After all, you bought the policy to ensure that the person or group you designated would get those benefits should the unexpected happen. With these simple tips you can be sure that you have set-up your beneficiary to best meet your needs and objectives. If you have any questions, a life insurance agent is always there to help.
PS - In addition to life insurance, you can also list beneficiaries on annuities and other retirement accounts -- pensions, 401ks, IRAs, etc. Plus most other financial assets, like bank accounts or stock brokerage accounts may allow for naming a beneficiary. So be sure to keep those accounts up to date as well.
If minor children have been named as the beneficiary of your life insurance policy, then it can become legally complicated.
Be sure to "kick the tires" before you purchase.
Life insurance can be used to help charities that are close to our hearts.