Life Insurance Beneficiary: Deferral Options And Their Benefits

Life insurance is a contract between a policyholder and an insurance company that pays out a death benefit when the insured person passes away. The death benefit is paid to the beneficiary, who is the person or entity that the policyholder designates to receive the benefit. The beneficiary can be a spouse, child, other family member, friend, charity, or trust. The policyholder can name multiple beneficiaries, including primary and contingent beneficiaries. The primary beneficiary is first in line to receive the death benefit, and the contingent beneficiary receives the benefit if the primary beneficiary is deceased or unable to accept the benefit. It is important to keep beneficiary designations up to date and to follow the correct procedures when making changes to avoid disputes.

Who can be a beneficiary?

When it comes to choosing a beneficiary for your life insurance policy, you have a lot of flexibility. A beneficiary is the person or entity that you legally designate to receive the benefits from your financial products. In the case of life insurance, this means the death benefit your policy will pay if you die.

Your beneficiary can be a person, a charity, a trust, or your estate. Almost anyone can be a life insurance beneficiary, but there are a few things to keep in mind. First, your beneficiary must have what's called an "insurable interest" in your life. This means they have more to lose than gain by your death, whether financially or otherwise. Additionally, your state of residence or the provider of your benefits may restrict who you can name as a beneficiary. For example, in some states, you may be required to list your spouse as your primary beneficiary.

When choosing a beneficiary, you'll want to consider those who rely on you financially and would need financial support in the event of your death. This could include your spouse, children, or other family members. You can name multiple beneficiaries and allocate a percentage of the payout to each. It's important to be as specific as possible when naming beneficiaries, including their full legal name, Social Security number, and relationship to you.

If you want to provide for minor children, you may want to set up a trust and name the trust as the beneficiary, as children under the age of majority (18 or 21, depending on your state) cannot receive a life insurance payout directly. You can also name a surviving parent or partner as the beneficiary, with the understanding that the payout will help cover child-related costs.

In addition to immediate family, you may also want to consider naming a charity or nonprofit organization as a beneficiary, especially if there's a cause that's important to you. There are a few different ways to do this, such as naming the organization as a beneficiary or adding a charitable-giving rider to your policy.

Remember, choosing a beneficiary is an important step in owning a life insurance policy, so it's worth giving it careful thought and seeking legal or financial advice if needed.

How to choose a beneficiary?

Choosing a beneficiary is an important step in owning a life insurance policy. Here are some things to consider when selecting a beneficiary:

• Understanding the role of a beneficiary: A beneficiary is the person or entity that receives the benefits from your life insurance policy or other financial products in the event of your death. This can include the death benefit from your life insurance policy, or the balance of your assets in retirement or investment accounts.
• Primary vs. contingent beneficiaries: There are two types of beneficiaries: primary and contingent. A primary beneficiary is the first in line to receive the death benefit from your life insurance policy, typically your spouse, children, or other family members. In case your primary beneficiary dies before or simultaneously as you, you can also name a backup beneficiary, known as a secondary or contingent beneficiary, to receive the death benefit.
• Who can be a beneficiary: Almost anyone can be a life insurance beneficiary, including individuals, organisations, and trusts. Common examples include a spouse, children, a charitable organisation, or a legal entity such as a company. Some states may have specific laws or restrictions on who can be named as a beneficiary, so be sure to research your state's laws.
• Number of beneficiaries: You can name multiple beneficiaries and outline the percentage of the policy payout each would receive. However, the total percentage of proceeds must equal 100%.
• Insurable interest: Beneficiaries must have an "insurable interest" in your life, meaning they have more to lose than gain by your death, whether financially or otherwise.
• Information required: When naming a beneficiary, be as specific as possible. Provide the person's full legal name, relationship to you, mailing address, email, phone number, date of birth, and Social Security number. This helps the insurance company verify and locate your beneficiaries if needed.
• Changing beneficiaries: You can typically change, add, or remove revocable beneficiaries at any time. However, if you have made an "irrevocable designation," you may need the current beneficiary's consent to make changes.
• When to update beneficiaries: It is important to keep your beneficiary designations up to date, especially after major life changes such as marriage, divorce, or the death of a loved one. Review your beneficiaries periodically to ensure they align with your current needs and circumstances.
• Special circumstances: If you have children, you may want to consider establishing a trust and naming the trust as the beneficiary. This can help manage the funds and ensure they are used for the benefit of your children, especially if they are minors. Similarly, if your beneficiary receives government assistance, be mindful that receiving a large sum of money from a death benefit may impact their eligibility for further assistance.

How to change a beneficiary?

Changing the beneficiary on your life insurance policy is a straightforward process, but it's important to remember to do it. Keeping your policy up to date ensures that the death benefit payout will go to the right person or people.

Who Can Change the Beneficiary?

The policyholder is the only person who can change the beneficiary designation. The only exception is if the policyholder has granted someone power of attorney, which allows them to make financial, legal, or medical decisions on their behalf.

When to Change the Beneficiary

It's a good idea to review your policy regularly, but you should definitely adjust your coverage after a significant life event, such as:

• Getting married or divorced
• Having a child
• A beneficiary's death
• Creating a new estate plan

How to Change the Beneficiary

To change the beneficiary, you need to contact your insurance company. You will need to fill out a change of beneficiary form, which will include information such as the policyholder's name, the new beneficiary's name, and the reason for the change. You may also need to provide a copy of the policyholder's death certificate if the beneficiary is being changed due to their death. Once you complete the form, submit it to the insurance company for approval.

Special Circumstances

In some circumstances, you may need approval to change the beneficiary. For example, if you live in a community property state and bought your policy after getting married, you'll need your spouse's permission to name someone else as your beneficiary. Similarly, if you have named an irrevocable beneficiary, you may need their approval to remove them from the policy.

What happens if there is no beneficiary?

If there is no beneficiary listed on a life insurance policy, the death benefit will typically go to the insured's estate and will be subject to probate. This means that the court will oversee the distribution of assets, and the insured's heirs may ultimately receive less than the original death benefit. The probate process can be lengthy and complicated, and it may take years before the insured's loved ones can access their assets.

In some cases, if there is no beneficiary listed on the policy, the payout may be paid to the owner of the policy if they are different from the insured person and still alive. For group insurance policies, the order typically starts with the spouse, then children, then parents, and then the estate.

If the primary beneficiary dies before or at the same time as the insured and there is no contingent (secondary) beneficiary listed, the policy's payout will go into the insured's estate, where it can be subject to estate taxes and claims by creditors. Therefore, it is important for policyholders to regularly review and update their beneficiary designations to ensure that the death benefit is distributed according to their wishes.

How to avoid disputes?

How to Avoid Disputes

Life insurance policies are intended to provide peace of mind and financial security for your loved ones after you're gone. However, disputes over beneficiaries are common and can lead to lengthy and costly legal battles. Here are some steps you can take to avoid disputes and ensure your wishes are honoured:

• Keep your beneficiary designations up to date: Life is full of changes, including marriage, divorce, the birth of children, or the death of a loved one. It is important to review and update your beneficiary designations regularly to reflect these changes. This will help avoid confusion or disagreement over who should receive the benefits.
• Understand the different types of beneficiaries: You can name primary beneficiaries, who are first in line to receive the death benefit, and contingent or secondary beneficiaries, who will receive the benefit if the primary beneficiaries are deceased.
• Be specific when naming beneficiaries: Provide as much information as possible, including the full legal name and relationship of the beneficiary to you. This will help the insurance company verify and locate your beneficiaries promptly.
• Follow insurance company procedures: Each insurance company has its own procedures for changing beneficiaries. Make sure you understand and follow these procedures correctly to avoid any issues.
• Discuss your decisions with your loved ones: Keep your loved ones informed about your wishes and any changes you make to your beneficiary designations. This can help avoid surprises and misunderstandings later on.
• Seek legal advice if needed: If you have a complex situation or are unsure about your decisions, consider consulting a lawyer or financial professional. They can help you navigate any state-specific laws or restrictions and ensure your beneficiary designations are correct.
• Review your policy regularly: Don't wait for a major life event to update your policy. Review it regularly and make changes as needed to reflect your current wishes.
• Be mindful of state laws: Some states have automatic revocation statutes that remove an ex-spouse as a beneficiary upon divorce. Be aware of the laws in your state and how they may impact your beneficiary designations.
• Consider creating a trust: If you want to provide for minor children or dependents with special needs, consider setting up a trust and naming it as the beneficiary. This can help ensure that the funds are managed and distributed according to your wishes.
• Update your will: In addition to updating your beneficiary designations, remember to review and update your will periodically. This can help ensure that your overall estate plan is aligned with your wishes and can reduce the risk of disputes.

Frequently asked questions