Life Insurance: Adding A Backup Payee, Simplified

When purchasing life insurance, it's important to choose a beneficiary, i.e., the person who will receive a payout from your life insurance policy. While you aren't required to name a beneficiary, it is highly recommended. If you pass away without naming a beneficiary, the payout becomes part of an estate, making it more complicated for your loved ones to access the funds. Most people name one primary beneficiary, typically a spouse or partner, and then a backup beneficiary, also known as a secondary or contingent beneficiary. This person will receive the death benefit if the primary beneficiary is no longer alive or unable to claim the benefit. You can choose almost anyone to be your backup beneficiary, including family members, close friends, or even a charity or trust. It's important to keep your beneficiary designations up to date and make changes as necessary, such as after major life events like marriage, divorce, or the birth of a child.

Understanding the role of a beneficiary

The role of a beneficiary in a life insurance policy is crucial. A beneficiary is the person or entity that receives the benefits from your financial products when you die. In the case of life insurance, the beneficiary is the person or entity that receives the death benefit payout from the policy. This is typically a loved one, such as a spouse, child, or other family member, but it can also be a charitable organisation or a trust.

It is important to carefully choose your beneficiary, as this decision cannot be changed after your death. You should also keep your beneficiary designations up to date, as your life changes (for example, through marriage, divorce, or the birth of children). Most financial services companies provide a form or website for you to designate your beneficiary.

When naming your beneficiary, you will need to provide their full legal name and their relationship to you. Some beneficiary designations also include additional information such as mailing address, email, phone number, date of birth, and Social Security number. Providing as much information as possible will help the insurance company verify and locate your beneficiaries.

You can choose to name a single beneficiary or a primary beneficiary and one or more contingent beneficiaries. A contingent beneficiary would receive the death benefit if the primary beneficiary passes away before you or at the same time as you.

While minor children can be named as beneficiaries, they cannot receive any benefits until they reach the legal age of consent. If you want the payout to be used for their benefit while they are still children, you may need to set up a trust or custodial arrangement.

In most cases, you can change the beneficiaries named on a life insurance policy at any time. However, in certain circumstances, such as specific terms of a divorce or an "irrevocable designation", you may need the current beneficiary's consent to make changes.

Naming a primary beneficiary

A primary beneficiary is the person (or persons) first in line to receive the death benefit from your life insurance policy. Typically, this is your spouse, children, or other family members. You can also choose a more distant relative or a friend. If you want to designate a friend as your beneficiary, be sure to check with your insurance company or directly with your state. In some states, beneficiaries who aren't relatives need to have an "insurable interest in your life" at the time you take out the policy. This means that they could suffer financially if you were to die.

When naming a primary beneficiary, it's important to be as specific as possible. Most beneficiary designations will require you to provide a person's full legal name and their relationship to you. Some beneficiary designations also include information such as mailing address, email, phone number, date of birth, and Social Security number. Providing as much information as possible will help the insurance company verify and locate your beneficiaries if needed.

It's also important to keep your beneficiary designations up to date as your life changes (marriage, children, divorce, etc.). You can change beneficiaries at any time by contacting your employer, financial professional, or financial services company to learn how.

Choosing a backup beneficiary

• Spouse or Partner: If you are married or in a long-term relationship, choosing your spouse or partner as your beneficiary might make the most sense. They can cover shared expenses, such as mortgage payments, and pay off any outstanding personal debts.
• Children or Dependents: If you have children or dependents, you may want to name them as beneficiaries, especially if you are a single parent without a serious partner. You may want to ensure they have money for school or can easily pay off any debts you leave behind. However, keep in mind that if you have minor children, most insurance companies will require you to choose an adult custodian or legal guardian to manage the benefits until they turn 18.
• Relatives: Outside of your partner, spouse, or children, a relative is a strong option. Choosing a relative—or someone else in your family that's near your age or slightly younger—may be a good idea.
• Close Friends: Most insurance companies are also fine with you naming close friends as beneficiaries.
• Charities: Many people name charities and other cause-related organizations as beneficiaries. If you have a nonprofit you feel passionate about, you can name it as a primary or contingent beneficiary to receive all or a percentage of your assets or life insurance payout.

Remember, you can choose anyone to be your backup beneficiary, but it's essential to consider how this decision will affect the important people in your life. Additionally, keep in mind that you should provide as much information as possible when designating your beneficiary, including their full legal name, mailing address, email, phone number, date of birth, and Social Security number, if applicable.

Changing a beneficiary

When you buy an insurance policy, you can designate each beneficiary as either revocable or irrevocable. If beneficiaries are irrevocable, it can be difficult to remove them from policies or change their share without their consent. For revocable beneficiaries, the change process is relatively easy, and you don't need permission (unless it's your spouse and you live in a common-property state).

To change a beneficiary, simply send the new person's details to your insurer. It's a good idea to have a few backups in mind at all times, as you never know when you might need to make a change.

If you have life insurance or retirement accounts through your employer, they may keep your beneficiaries on file for all of your employee benefits. If you have investments, retirement accounts or life insurance through a financial professional, check with them to make sure you have beneficiaries on file.

When changing a beneficiary, you will need to provide the person's full legal name and their relationship to you (e.g. spouse, child, mother, etc.). Some beneficiary designations also include information like mailing address, email, phone number, date of birth and Social Security number.

If you are worried about making a mistake when naming your beneficiaries, consult a financial professional or attorney to ensure your intentions will be carried out as you wish.

Why you should name a beneficiary

Naming a beneficiary is an important part of owning life insurance. A beneficiary is the person or entity that you legally designate to receive the benefits from your financial products. For life insurance coverage, this is the death benefit your policy will pay if you die.

Although it is not mandatory to name a beneficiary, it is usually the reason people buy life insurance in the first place – to provide a benefit to the people they care about. By naming a beneficiary, you can make sure your benefits go to the right person or people.

If you don't name a beneficiary, it may be unclear who is entitled to the funds, which can delay the benefit payment. For retirement accounts like a 401(k), if you die without a beneficiary named, your assets will likely be held in probate – a legal process where a court has to sort out your financial situation and determine how to distribute your assets. This process can be lengthy and complicated, and it may take years before your loved ones can access your assets.

You can name several people as your beneficiaries if you'd like. However, you then have to decide how you want the money split up between them. Usually, the best way to divide up the money is by percentage.

Your beneficiary can be a person, a charity, a trust, or your estate. Almost any person can be named as a beneficiary, although your state of residence or the provider of your benefits may restrict who you can name. Make sure you research your state's laws before naming your beneficiary.

Frequently asked questions