Life insurance beneficiaries are a person or entity you choose to receive the death benefit you have received from your insurance policies. You may name one or more. The beneficiaries could be anyone you want, including a spouse, child-parent, charity, friend, or trust. Learn more about the life insurance beneficiaries within this post.
What Is a Life Insurance Beneficiary?
The term “life insurance beneficiary” refers to the person or organization you choose to get the death benefit of your life insurance policy if you die.
The beneficiary gets the death benefit since the life insurance policy is an agreement you sign with the company you have chosen to insure. The face value of the policy will be paid to the beneficiary, regardless of your will, probate courts, or relatives say.
You may choose multiple beneficiaries and choose what percentage of death benefits goes to each beneficiary.
Life insurance policies are also a great way to keep companies, specifically family-owned businesses, in business. In this instance, it is possible that a business could be designated as the beneficiary since the “key man” or rainmaker has departed.
The amount of life insurance you can afford and the type of policy will determine the person you’re likely to choose to be the beneficiary. For instance, think about these kinds of insurance.
- A time-bound insurance policy with a term of 30 years may be enough to pay for your children’s college or to run your business.
- A modest funeral insurance policy could cover your funeral.
- The Universal life insurance policy could be a good option for those with assets to transfer them to their descendants.
Whatever your needs are, it’s crucial to choose the right recipient.
Primary vs. contingent beneficiary
The primary beneficiary is entitled to the death benefit upon the policyholder’s death; however, what happens when the primary beneficiary has died or cannot collect this death reward? That’s why you require an uninvolved beneficiary, the secondary beneficiary.
There is the possibility of having several primary beneficiaries and some contingent beneficiaries. These are the distinctions between contingent and primary beneficiaries.
- Principal beneficiary. Receives the death benefit if the policyholder dies.
- A Contingent beneficiary. Receives the death benefit only if the beneficiary who is the primary beneficiary isn’t able to benefit from it, for example, when the beneficiary has already passed away or isn’t willing to take care of this benefit.
It’s a good idea to have at the very least at least one beneficiary contingent (in addition to the primary beneficiary) in case of. You can name your family members, friends, charitable organizations, children, or guardianship of your children if you should die.
The policy’s death benefit is paid to the estate of the policyholder if both the contingent and primary beneficiaries die before the policyholder’s.
Who Can Be a Life Insurance Beneficiary?
Anyone can be named as the beneficiary of a life insurance policy. Trusts, estates, and charities are also able to be named beneficiaries.
Some state laws might make it necessary to designate your spouse as the primary beneficiary, receiving at least 50% of your benefits. In certain states, you can designate anyone, not your spouse, as a beneficiary, provided you’ve obtained written permission from your spouse.
How Do I Choose a Life Insurance Beneficiary?
You can consider naming a living insurance beneficiary to pay for whom or what you would like to support, such as your spouse, a beloved charity, a pet, or even your funeral.
Insurance companies often look at the people who’ll most require the money should they pass away. These are those who depend on your savings or income.
Designating a beneficiary
There are two options to consider when selecting beneficiaries.
- The policy is revocable. In this case, you can alter the beneficiary you wish to be at any point during the policy term.
- Revocable. An irrevocable beneficiary cannot get removed from the insurance or get their share of the death benefit altered without their approval. The irrevocable beneficiary should also be informed when you end the policy.
Choosing which death benefit should be paid
Other options are available in determining the method by which the death benefit will be given to the beneficiaries.
- Per head (by “head”). In this scenario, the amount is divided equally among all beneficiaries, typically the children.
- Per Stirpes (by “branches”). This means that if a child passes away, the person who holds the policy, the branches, receives the amount that would otherwise be distributed to the remaining children. Per Stirpes, it is a valuable instrument to protect grandchildren, especially when they’ve lost the parent they loved.
Establishing a trust
In the case of protecting grandchildren or those beagles who were your most trusted companions in your final years, nothing can work like establishing a trust that will cover all, or at the very least part, of the funds you have in your policy. Through a trust, proceeds from life insurance will automatically go to the trust and not to the estate.
However, if you choose to do this, selecting trustworthy trustees is crucial. You should ensure that the beneficiary’s young age will not spend his inheritance on a Ferrari and forget about his college. It’s also possible to ensure that your favorite charity gets the funds needed to end hunger in the world or even stop dogs from entering the animal shelter.
Trust is a means to achieve this. It will keep your fingers in the water of your financial boat even after your departure. An attorney can help create a trust as a part of your estate plan.
Imagine it as one of the most memorable times that you and only you decide the best option. It is, after all, your decision, and you are free to make it as you want.
When to Update, Change, Add or Remove Beneficiaries
It is recommended to change, update, add, or remove beneficiaries from your insurance policies for life at any time your financial or personal situation changes. Here are a few frequent life events that might require a change in the beneficiary designations on your policy:
- Divorce or marriage: If you get married or divorced, it is essential to change the beneficiary designations of your beneficiaries to reflect your marital status.
- The birth or the death of the child: If you have an infant or child who dies, you must modify your beneficiary designations to reflect the modification.
- Change in financial circumstances: If you experience significant changes in your financial situation, like a loss of employment or an increase in the amount of income you earn, you might be prompted to revise the beneficiary designations of your beneficiaries to reflect the modification.
- Health changes: If you become severely ill or disabled, you might be required to revise the beneficiary designations so that the person or persons you cherish the most will be looked after financially during your death.
- Changes in the estate planning goals: If you decide to modify your will or any other documents for estate planning purposes, you must be sure to update the beneficiaries on the life insurance policy to ensure they match your entire estate plan.
It is vital to remember that you can change the beneficiaries’ designations at any point. However, changing your beneficiary designations every year is recommended to ensure that your beneficiary designations remain current and accurate.
To update the beneficiary names, it is necessary to be required to contact your life insurance provider and provide them with your latest beneficiary details. The procedure for changing beneficiary designations may differ according to the insurance company. Therefore, it is best to contact them directly for additional details.