Life insurance is a financial contract between the insurance company called the insurer and the policyholder called the insured where the insurer agrees to pay a lump sum in case of death of the insured to the beneficiary. For the insurance company to pay the designated amount regular premium payment has to be made. Traditionally, men have been investing more in Life Insurance than women for various reasons. But a common dilemma both experience is regarding the beneficiary.
Before you get ahead and know how to name a life insurance beneficiary it is essential to know who is a beneficiary and why to name one.
Who is a beneficiary and why have one?
A life insurance policy is taken out by the breadwinner of the family because if any untoward incident happens to the insured and he dies, the family is still protected from financial difficulties. A beneficiary is a person who would receive that money if the insured were to die before the insurance policy matures.
Since the death benefits obtained by life insurance are not covered by a will it is essential to name a person who gets the payment as benefits so that your intention of owning a policy i.e ensure your family’s financial security is fulfilled.
What happens if you don’t have a beneficiary?
If there is no beneficiary mentioned in the insurance policy or if the beneficiaries that you have mentioned have passed away then the estate takes hold of your benefits. It then becomes a long legal process where it can stretch for months and it gets divided among creditors before your family receives any money. It is thus recommended that beneficiaries be named so that your family gets the money without getting reduced.
How to choose a beneficiary?
Consider the following while choosing a beneficiary.
- Family: Most people pick their immediate family members who are dependent on them for financial support as their beneficiary. It can include spouse, domestic partner, siblings, children, parents or other family members.
- Guardian: If you have named a minor as a beneficiary then the insurer will need a legal guardian.
- Estate: Estate can be chosen as the beneficiary and the benefits will be awarded to the executor of the estate. But note that you can do this if you have made a will and that no specific person is on the beneficiary list.
- Trust: A trust can be set up and named as the beneficiary.
- Key-person life insurance: Businesses take life insurance on key personnel in the company. The business owner may own insurance and name the partner as the beneficiary so that the purchase of the policyholder’s share is easy.
While you can name anyone as a beneficiary there are restrictions if you are married and live in community property states. These states have a rule that if the insured wants to name anyone other than the spouse, they have to waive their rights so that others can be named as beneficiaries.
Do’s and Don’ts of naming beneficiary:
- Identify who will be the primary beneficiary and include their name, address, date of birth, etc and specify the percentage in case of multiple beneficiaries
- Ensure that you include a contingent beneficiary (person who takes over if the primary dies after your death)
- Update the policies so that it is current and amend it in case of an addition to the family, death or divorce.
- Give a generic name as a beneficiary like ‘spouse’ or ‘children’. If there is a divorce filed then it can lead to legal battles.
- Add people with high-risk habits like chain smokers, drug addicts as Ty Stewart from Simple Life Insure says that while most people realize that cigarette smokers are considered higher risk with life insurance providers, those who vape are also considered high risk.
- Forget to include adopted children or grandchildren
- Make minor as a beneficiary unless there is a legal guardian appointed
- Make ‘estate’ as a beneficiary if you have family members who should get the benefits
- Name a creditor as beneficiary
- Forget the tax implications on the beneficiary
How to designate a beneficiary?
Once you have decided who you want to name as your beneficiary it has to be mentioned in the insurance beneficiary designation form so that it becomes legal. It is a legal document that the insurance company will use to pass the benefits in case of the policyholder’s death. This will override the will and any other estate planning.
Ensure you name at least 2; one is the primary and the other contingent who is a backup to the primary who will get the death benefits in case the primary dies. It is also essential to be specific and updated while assigning beneficiaries else it could lead to legal disputes. If you get divorced, ensure that you change your preference accordingly. Here are the details needed in the insurance designation form.
- Date of birth
You can also add multiple beneficiaries by assigning specific percentages.
How to change beneficiaries?
Changing beneficiaries is simple and easy and has to be done using a beneficiary change form which can be obtained from your life insurance policy. Fill the form and return it to get it updated. The only cases that get consented are those with divorce or soon after death when the former spouse is not removed. So it is essential to keep the list updated regularly as the purpose of having life insurance gets defeated if it goes to the unintended person or the benefits are tied due to legal issues.
An average person will have many Insurance policies and the most common ones that benefit the families are life and health insurance. To ensure that your family benefits from these policies it is critical that you name the right beneficiary. Naming the right person requires you to put some thought as any wrong move can lead to legal or tax issues. So make some time to make the right decisions and update it regularly to keep it current.