Life insurance is a contract between an insurance policy holder and an insurance company in which the insurer promises to pay an amount of money in return for a premium upon the death of an insured person or after a certain period of time. A life insurance beneficiary is a person or entity who gets money from a policy’s death benefit upon the death of a person. When you acquire a life insurance policy, you have to select the beneficiary.
Who can be a Life Insurance Beneficiary?
A life insurance policy beneficiary can be anyone. From a spouse, child, relative, or friend, to charities, trusts, and estates, there are no limits on who can be named as a beneficiary. Furthermore, life insurance beneficiaries are distinct from those named in your will, so the two lists do not have to overlap, but they can.
Keep in mind that in some places, you may be mandated to select your spouse as your principal beneficiary, with at least 50% of the benefits going to them. And unless you obtain documented consent from your spouse, you may not be able to name someone other than them as a beneficiary.
8 Tips on choosing a Life Insurance Beneficiary
1. Choose the individual who is most reliant on your income
In general, the profits of your insurance should be distributed to the person or persons who would be the most financially impacted by your death.
2. Beneficiary age
When naming a beneficiary, the first thing to consider is the person’s age. If he or she is a minor, a few more procedures must be taken to ensure that life insurance beneficiary laws are followed. If you want to identify a minor as a beneficiary, you must usually select a guardian to manage the money until the minor is of legal age to receive it. It is important to select a guardian whom you trust adequately to manage the money left to your children.
3. Decide on how it will be dispersed
You can designate more than one individual to receive death benefits if you have a life insurance policy. If you choose this option, you must decide how the proceeds of your life insurance policy will be dispersed. When it comes to how benefits will be allocated, there are two primary options.
4. Inform your beneficiary that they have been chosen
People you select to benefit from your life insurance should be aware of their position and the amount of the benefit they will get so that they may behave appropriately. Inform not just family members, but also any business partners who may benefit.
5. Choose a backup
What if your primary beneficiary passes away before you, can’t be found, or refuses to accept the proceeds? You should always have a backup beneficiary to resolve this. If you choose a secondary beneficiary, your death benefit will be paid to that person directly.
6. Adjust beneficiaries as your life changes
Life isn’t static, and just as you should update the policy to reflect changing circumstances, such as a divorce, your list of beneficiaries should be re-evaluated regularly. Schedule yearly life insurance evaluations with your financial counselor or insurance agent.
7. Make use of precise wording
Beneficiaries can be listed by name. You can also name them by class, such as “grandchildren of the insured.” Complications might happen regardless of whatever strategy you use. Assume you list your grandchildren’s names on your insurance. However, when your youngest grandchild was born, you did not update it. If this is the case, they will not be entitled to a portion of the income upon your death. In contrast, if your beneficiary is “all children born from this marriage,” an adopted kid may not receive a portion of the compensation.
8. Align your Will with your Life Insurance Beneficiary
Beneficiary selections on your life insurance policy will almost always take precedence over wills. You should ensure that your will and life insurance policy are in sync so that your desires are carried out. Furthermore, you cannot change your life insurance coverage with your will. As a result, naming someone as a beneficiary of your life insurance policy ensures that they will get the death benefit regardless of what is in your will.
What happens if there is no Life Insurance Beneficiary?
If you do not name a beneficiary, the profits of your life insurance become part of your estate. The proceeds of your life insurance are dispersed by the rest of your assets. Your estate may need to go through Probate, which can cost a lot of money and take a long time to reach your heirs.
How to Change a Life Insurance Beneficiary
It is simple to change your beneficiary. Contact your insurance company to modify the beneficiaries on your life insurance policy. A change of beneficiary form must be submitted online, on paper, or over the phone. Personal information about your recipient, such as contact information, will be requested on the form.
Only when there are irrevocable beneficiaries does this method get complex. This is because you cannot remove or amend the designated payment for irreversible beneficiaries, without their approval.
The most crucial aspect of having life insurance is selecting a beneficiary – the person or entity that gets the benefits after one dies. Selecting this recipient may not be a simple process. After all, policy guidelines might restrict your selections. Furthermore, updating or amending your beneficiary also has its processes. As a result, before you agree to a policy, you must fully grasp how your life insurance company handles beneficiaries.