While no one wants to think about what happens after they die, it’s important to make sure the people you care about will be financially stable. That’s where life insurance comes in. Life insurance coverage protects your loved ones if something happens to you.
Of course, doing that means you need to decide who will actually benefit from your life insurance (also known as your beneficiary). While the decision often seems obvious, there are a few things to consider first. Here’s what you need to know about choosing a beneficiary.
What’s a life insurance beneficiary?
A life insurance beneficiary is the person or entity who will receive the money from your life insurance policy when you die. This can be:
- Your partner
- Your child(ren)
- Your parent, sibling, or other relative
- Your business partner
- A charity or other organization
- Your trust or estate
How does it work?
If you die while your life insurance policy is active, your insurance company will pay a lump sum to your beneficiary. For example, if you have a $500,000 policy, your beneficiary will receive a $500,000 payout—no strings attached. This is money your family can use to replace your income and help meet expenses, including funeral costs, credit card and loan debts, tuition costs, and other day-to-day expenses.
Choosing the right beneficiary ensures your money will be distributed the way you intended it. For instance, if your situation requires a quick payout to a member of your family, naming an individual as your beneficiary, in lieu of a trust or estate, can ensure the payout on a life insurance policy goes directly to your beneficiary, providing them with important income when they need it most.
What should you consider when choosing a life insurance beneficiary?
Start by looking at why you’re buying life insurance. Is it to replace your income to support your partner and children? To help pay for your funeral or other end-of-life costs, like medical bills? To cover student loans or other debts? To support your business? Answering questions like these can help you choose the right beneficiary.
If you’re married, your spouse may be the obvious choice for your beneficiary. Your life insurance payout can help cover day-to-day expenses, and if you have children, you’ll want to make sure there are also funds to cover costs like childcare and college tuition.
In some cases, you might want to consider other beneficiaries such as:
- Your children: If you’re a single or divorced parent with kids, you may want to name your child or children as the beneficiary. If they’re still minors, though, you’ll need to set up a trust and name that trust as the beneficiary (more on that in a minute).
- Other family members: If you’re single and have life insurance just to cover your final expenses and outstanding debts, you may want to appoint a parent, sibling, other family member, or close friend as your beneficiary. Funeral costs are typically in the neighborhood of $10,000, so life insurance helps to make sure you don’t place a financial burden on family if the worst happens.
- Business partner: If you’re a partner in a company and required to take out life insurance for your business, you’ll likely want to name the entity or partner as the beneficiary.
When naming your beneficiaries, you’ll need to provide certain key information about them, including their full legal names, birthdates, and Social Security numbers. Remember, your insurance company will need to confirm the identity of your beneficiaries after your death, so you want to provide as much information as possible so it’s easier for them to receive the payout.
What do I need to consider when choosing a beneficiary?
While naming a life insurance beneficiary is typically an easy and straightforward process, there are a few rules to follow so that your beneficiaries can avoid problems later.
- Age: Life insurance companies will in most cases not directly pay benefits to someone under the “age of majority” (which can be 18 or 21, depending on the situation). If you name a minor (like a child or grandchild) as the beneficiary, they likely can’t receive the money directly until they’re adults. A better option could be to set up a trust, name it as the beneficiary, and appoint a guardian to manage the money until they’re older.
- Disability: If your beneficiary is disabled (like an adult child with special needs), you’ll also probably want to create a trust for the money and name that trust as the beneficiary. These types of trusts require special setup to ensure the beneficiary can receive the insurance benefits without losing government assistance like Medicare, which is needs-based. Be sure to consult with an estate planning attorney to make sure your trust is set up correctly.
- State laws: Some states have restrictions on who you can name as a beneficiary. For example, in community property states, if you want to name someone other than your spouse, your spouse would also likely have to sign the beneficiary change form agreeing to this. Check with your insurance carrier about the rules that apply in your state.
Do I need more than one beneficiary?
It’s important to name at least one primary beneficiary. Otherwise, the insurance payout may go your estate, which can mean months of legal processing time to sort out the distribution. In some cases, you may want to name multiple primary beneficiaries. For instance, if you have more than one child, you can name both and designate how much of the payout goes to each.
It can also be smart to name a secondary (contingent) beneficiary. That way, if your primary beneficiary (like your spouse) has already died when you pass away, the benefit would go to your secondary beneficiary.
Updating your beneficiaries
Life changes, so it’s important to make sure the beneficiary for your life insurance changes with it. It’s not uncommon to find a former spouse or dead relative listed as the beneficiary, and once you die, there’s nothing anyone can do about it.
To avoid this, a good rule of thumb is to review your beneficiaries once a year or after major life events like marriage, divorce, or a new baby. You can update your beneficiaries anytime, and the process is typically easy—just ask your insurance company for a change of beneficiary form.
Why it’s important to name a beneficiary
The whole idea behind life insurance is to protect the people who matter most to you.
The last thing you want to do is to add to the burden of losing you. Naming a beneficiary eliminates confusion and makes your wishes clear. It also saves time, avoiding payout delays that can crop up when the courts—rather than you—determine who will receive the benefit. Most of all, naming a beneficiary enables you to provide for your loved ones’ immediate needs and to help them down the road.
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