Life Insurance Beneficiary

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    Choosing A Life Insurance Beneficiary: Who Receives Your Death Benefits?

    If you're purchasing life insurance, you're likely doing so to financially secure your loved ones after your eventual death. Unfortunately, you can't protect everyone, and selecting a beneficiary isn't as straightforward as you'd anticipate. Nominating a beneficiary can be just as challenging as shopping for the life insurance policy itself. 

    Nearly 40% of Americans leave their families in financial distress because they either don’t have life insurance or they select the wrong beneficiary. Hence, it’s important that policyholders know the ins and outs of selecting the appropriate recipient of their death benefits. By familiarizing yourself with the process, you can work your way towards narrowing down your options.

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    What Is A Life Insurance Beneficiary?

    A beneficiary is a person or estate receiving the death benefit from your whole or term life insurance policy in the event of your passing. Payout proceeds can cover end-of-life expenses such as funeral services or settle an existing mortgage and debts.

    Some policyholders will select who will be most monetarily impacted by their death. If many people are at risk of financial distress, they might name more than one beneficiary. 

    Who Can You Name A Beneficiary?

    Contrary to popular belief, a beneficiary doesn't have to be a person – a policyholder might also consider an organization or living trust. In some cases, policies limit the number of beneficiaries you can name. Thus, you should always be specific and selective when considering all viable candidates and provide all the information necessary.

    Your Children

    If you're a parent, selecting your children as beneficiaries may seem like an intuitive choice. However, you should keep in mind that children under legal age won't receive the death benefit until they are 18-years-old. If your family resides in Alabama or Nebraska, your child will have to wait an additional year until they're 19.

    While most life insurance companies will allow you to name a child as your beneficiary, the funds will first funnel into a custodian account, which is inaccessible until the age of majority. If you wish to provide immediate access upon your death, you can instead appoint a guardian. However, the state must first grant legal rights to manage their finances, becoming a costly and long-term process.

    Alternatively, you can choose to set up a life insurance trust, allowing a trustee to oversee distribution to your children. Nonetheless, the trust must be valid and active at the time of your passing.

    Your Spouse

    When married with kids, naming your spouse a primary beneficiary allows them to continue to provide for your children and shoulder other economic hardships your passing may bring. This might include paying off an existing mortgage, household upkeep, and taking care of active loans at the time of your death. In the same vein, having your partner list you as their primary beneficiary will come in handy for the same reasons.

    Beneficiary 2

    Your Estate

    Alternatively, you can choose not to name a living person your life insurance beneficiary and instead underwrite your estate. Keep in mind that while life insurance lump sums are hardly taxable, this may not be the case if you're leaving behind a significant inheritance.

    Even dictated in your will, your death benefit becomes vulnerable to claims and stalled at probate court. Thus, if you're naming your estate, make sure to work closely with a qualified attorney and consider all inheritance implications and risks.

    Your Charity Of Choice

    If you've been supporting a charitable group throughout your life, that generosity can continue after your passing. Some individuals choose to name a religious organization, educational institution, healthcare society, or private foundation as their life insurance beneficiary.

    If you want to designate contributions to specific programs or stipulate your donation, you can choose to open a charitable trust instead of handing out a lump-sum.

    Primary vs Contingent Beneficiary

    A primary beneficiary refers to the individual or entity first in line to receive the benefits on your life insurance policy. For an individual to qualify as a primary beneficiary, they must prove to be legally competent to receive coverage.

    A contingent beneficiary, or secondary beneficiary, will receive the benefits if the primary beneficiary expires before you do. Moreover, contingent beneficiaries can displace primary ones if they cannot be located or refuse to receive death benefits.

    Naming Multiple Beneficiaries

    Say you want to leave life insurance benefits for more than one person – like your adult child and your spouse, for example. You can name your spouse a primary insurance beneficiary with 70% of the share and your child as a contingent receiver with 30%. Alternatively, you can split the life insurance proceeds between family members, a trust, and an organization, so long as you indicate percentages for each. Always provide complete information when leaving coverage for multiple beneficiaries.

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    Irrevocable Or Revocable?

    If you designate someone as an irrevocable life insurance beneficiary, you can't replace them without their consent. As such, irrevocable beneficiaries aren't very common unless you aim to guarantee that the life insurance benefit falls into the hands of a specific person or entity.

    On the contrary, revocable life insurance beneficiaries are more flexible. A policy owner can change, add, or update a revocable beneficiary during an active policy stage. The revocable option is particularly useful for unmarried individuals without any dependents.

    While many believe they'll never replace their existing beneficiaries, there are some instances in which doing so might make the most sense:

    • You get married while the policy is active.
    • You file for divorce and want to remove your former spouse from your policy.
    • You have children, while the policy is active.
    • Your grown children are no longer financially dependent on you or have their own life insurance policy.
    • Your beneficiary dies while the policy is active.

    Choosing Not To Name Anyone

    Though typically advised against, some people will choose to name no one as their beneficiary, with life insurance proceeds going into an estate. However, depending on your life insurance policy, an insurer might distribute the benefits according to a priority order. This order lists the surviving spouse, kids, parents, and administrator of an estate in most cases.

    One exception is if you live in a community property state, in which both you and your partner are considered joint owners. Under these circumstances, the life insurance proceeds will automatically go to the surviving spouse, regardless of whether a beneficiary was named or not. The only way to ensure that the money goes to the rightful beneficiary is for your spouse to provide written consent.

    Your life insurance policy might become subject to community property state laws if you applied for it in any of the following states:

    • Wisconsin
    • Washington
    • Texas
    • New Mexico
    • Nevada
    • Louisiana
    • Idaho
    • California
    • Arizona

    Tips For Choosing A Life Insurance Beneficiary

    If you're buying a life insurance policy, you likely have an end goal in mind. Sometimes, it's due to significant life events, such as a new marriage, the birth of a child, or purchasing a home. The purpose behind your life insurance policy will dictate the process of naming a beneficiary. If you're having trouble designating a family member or entity, keep the following tips in mind.

    Understand Your Reasons For Taking Out Life Insurance

    A life insurance policy doesn't benefit its owner – it financially secures who they leave behind when they pass away. Always consider your potential beneficiary's circumstances and discuss them with your financial advisor.

    Review Your Policy

    Some life insurance policies are more restrictive than others, so you'll always want to read between the lines and terms of use. If you don't feel you can select a life insurance beneficiary from the get-go, consider taking out a more flexible policy or working with a life insurance company willing to facilitate changes.

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    Explore Other Choices & Have A Back-Up

    Especially for single people, there are more choices to consider than a spouse or child. Remember, your life insurance beneficiary doesn't have to be a person. Optionally, you might want to name two or more people. For example, you can designate three of your adult children equally or according to who can best manage the money.

    As a general rule, you'll also want to have a backup plan. Say your primary beneficiary is in poor health. If they pass away before you do, you'll want to have named a contingent beneficiary as a replacement.

    Be Specific

    Among the few life insurance basics that many tend not to pay attention to, it's not being specific about who their beneficiary is. Naming a beneficiary as "partner" or "mother" is too open to interpretation. As much as possible, provide complete information such as their full name, permanent address, contact details, and more.

    Avoid Choosing A Minor

    One of the most common life insurance mistakes a policy owner can make is naming a disabled individual or a minor. Regardless of how compromising your life insurance company is, designating a minor can pose some legal problems. Depending on the state, a minor child will have no access to the proceeds until they're 18 years of age or, in some cases, 21.

    Those who insist on naming a minor typically undergo a lengthy court process merely to name an adult custodian to oversee the trust. Some manage to transfer the proceeds immediately by arranging a UTMA custodianship with their life insurance company directly or setting up a trust fund.

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    Don't Forget Your Will

    It isn't enough to leave a universal life or term life insurance policy to your selected beneficiaries in your will. You'll need to indicate the designation in the life insurance policy itself. Contrary to popular belief, an insurance company can trump your will if you fail to appoint any beneficiaries.

    Talk To Your Family

    Though it may seem intuitive, many forget to tell prescribed life insurance beneficiaries that they'll receive coverage after their passing. Understandably, discussing your eventual passing with a loved one doesn't always make for good conversation. However, answering any questions they might have can provide you and your family with peace of mind.

    This is especially important if you've chosen multiple beneficiaries, you'll want to inform them about life insurance basics and provide useful information and resources for them to study.


    Can You Change Your Beneficiary? 

    You can only change a beneficiary if they are revocable or if irrevocable assignees provide consent. However, methods may vary according to the insurance company you hire. For instance, some life insurance companies require that you sign a form in front of a witness, whereas others allow changes online.

    Can You Choose More Than One Beneficiary? 

    Yes, you can choose several people to provide long-term care to so long as you indicate how much of your resources you want to be distributed to each appointee.

    What If A Beneficiary Dies Before Receiving The Life Insurance Death Benefit? 

    If a beneficiary dies before you do, you can appoint another one or replace them with your contingent heir. However, if they die after you pass away, the money either goes to your secondary donee or estate. These terms might vary with different companies or the underwriting in your contract.

    How Much Does Each Beneficiary Receive If You Name More Than One? 

    How much coverage someone receives from your policy is entirely up to you – whether by an 80-20 ratio, 70-30 ratio, or 50-50 ratio. Make sure to state this clearly on your term life insurance policy.

    Is Whole Life Insurance Coverage Taxable? 

    Among the worst mistakes a policyholder can make is forgetting about gift tax under federal law. Make sure you’re not accidentally making your benefits taxable!

    In Conclusion

    If you're working with a life insurance company to provide long-term financial care for your loved ones after you pass away, selecting your beneficiaries is just as important as the policy itself. Who you name on your life insurance contract ultimately comes down to is who requires significant monetary support when you're no longer around.

    As part of your estate-planning process, never rush into a decision on your policy, and work closely with your life insurance agent to provide as much detailed information regarding your terms. With Wesley LLC, you can learn how to link up with the right life insurance company and receive all the information you need about permanent and term life insurance. Contact us to discover your options.

    Written By Cameron McDowell
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