How to Select a
Life Insurance Beneficiary
How to Select a Life Insurance Beneficiary
One potato, two potato, three potato, four…remember that game? Whoever you landed on was It.
Picking a life insurance beneficiary isn’t like that.
Your beneficiary will be the one receiving and managing the money from your life insurance death benefit after you pass away. How do you want that money used? Who will need it most? It’s important you choose the right person and reevaluate that choice as your circumstances change.
Who Can Be a Beneficiary?
Pretty much anyone. It can be:
- your spouse or domestic partner
- your children
- your parent(s) or another family member
- a charity
- a friend
- a business partner
- A trust
Just know this. If you don’t choose a beneficiary, one will be chosen for you.
Why You Need a Beneficiary
Your death benefit—the one you’ve paid premiums into—must go to someone. A death benefit with no beneficiary goes straight to your estate. Which sounds okay. Except that going through your estate will keep the money tied up in probate court for six months to a year.
If after you die your family needs immediate financial support to make up for your lost salary, pay the mortgage, clear debts, pay taxes, and pay your funeral expenses, well, they’ll just have to wait. Also, your estate pays the legal fees, leaving your loved ones with less than you intended.
Tips for Choosing the Right Beneficiary
Who will benefit from the money the most?
Be specific. Is it your minor children? Then your spouse probably makes the best choice as minor children can’t inherit assets directly. If you haven’t specified precisely by whom and how your death benefit will be managed, the court will assign a guardian to make those decisions on behalf of your children, not you.
Do you want to leave your benefit to more than one person?
If you would like your benefit distributed among a few people, make sure you identify them by name (“children”, for example, is too vague). And stipulate the percentage of your death benefit each will receive. Percentages are a better measure than dollar figures as your death benefit amount may fluctuate, depending on your policy.
Keep your beneficiaries up to date with each major life change.
Life changes include marriage and divorce, each of your children’s births, when your adult children leave the house, and if you become responsible for your aging parent(s). Keeping your policy up to date will avoid misunderstandings, like having your death benefit go to your ex-spouse because you forgot to update your life insurance policy.
Keep your life insurance policy aligned with your will.
When there’s confusion about who gets what, the insurance policy, being a legal contract, will supersede the will. (See above paragraph regarding an ex-spouse).
What If My Beneficiary Dies Before I Do?
This is where your second, or contingent beneficiary, comes in. And choosing a contingent beneficiary is every bit as important as choosing your primary beneficiary.
This is especially true if you have children and your spouse predeceases you. If you want the money to go directly to your children but they are too young to manage it, set up a trust and make the trust your contingent beneficiary. The trust, managed by the legal guardian you’ve chosen to raise your children, will manage the trust to make sure your children’s needs are cared for and relinquish whatever money remains in the trust once they reach early adulthood.
A quick caveat: If one of your chosen beneficiaries receives financial assistance for a special need or disability, be aware that if you leave them more than $2,000, it may cause them to lose that subsidy. Make sure you take this into account.
Many insurance companies allow you to choose more than one person or organization as your contingent beneficiary.
For example, if you are married without any children and your primary beneficiary, say your spouse, dies before you do, you can divide your death benefit between your aging parent and your favorite charity.
Are there Certain Requirements or Restrictions?
It depends on the state you live in.
Some states have community property laws, which mandate that all property obtained during a marriage is equally owned by each partner in that marriage.
This means that, if you do not want your spouse to inherit your entire death benefit, he or she must sign a waiver that relinquishes their right to half of your shared assets.
States that have community property laws include:
- New Mexico
It also depends on the insurance company, for a different reason.
If an insurance company suspects that a beneficiary has coerced the benefactor into assigning them as a beneficiary, the insurance company will refuse to issue the death benefit. Which then makes it part of your estate. So, if you end up sad and lonely in your old age, don’t get too chummy with your at-home healthcare worker. Your children—and your insurer—will not remember you fondly.
Got a beneficiary or two in mind? Get a term life quote today..