Adding A Beneficiary: A Simple Guide To Life Insurance

Life insurance is a way to provide money to your loved ones after you pass away. The person or entity who receives the death benefit from your policy is called the beneficiary. While it is not mandatory to name a beneficiary, it is highly recommended, as not doing so may result in the payout becoming part of your estate, which can delay the payment to your loved ones and may be subject to estate tax. When choosing a beneficiary, you can select a close relative, such as a spouse or child, or even a friend or charitable organisation. You can also have multiple beneficiaries and decide how you want the money to be split between them. It is important to keep your beneficiary designations up to date and make any changes by submitting the new beneficiary's information to your insurance company.

Understanding primary and contingent beneficiaries

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 may name more than one primary beneficiary and designate how the assets will be divided among them.

A contingent beneficiary, also known as a secondary beneficiary, is the second in line to inherit the asset. They will only inherit if the primary beneficiary has predeceased you or otherwise can't be found. For example, if you name your spouse as the primary beneficiary and your child as the contingent beneficiary, the death benefit will go to your spouse if they outlive you. If your spouse passes away before you, the life insurance proceeds will pass to your child instead.

You can name multiple contingent beneficiaries and divide your estate among them. For instance, you may name your spouse as the primary beneficiary and your two children as dual contingent beneficiaries. If your spouse predeceases you, your children will each receive a portion of your estate following your death.

It is important to keep your beneficiary designations up to date, especially after major life changes such as marriage, children, or divorce. While it is not mandatory to name a beneficiary, it is usually the reason people buy life insurance—to provide a benefit to the people they care about.

Naming minors as beneficiaries

While it is possible to name a minor as a primary or contingent beneficiary, it is not recommended. If the minor is still a minor when you die, they will not be able to receive the life insurance benefit directly. Instead, the proceeds may be sent in their name to the legal guardian of the minor child's estate. A court will appoint an adult custodian who will be responsible for managing the funds from the payout. This process can take several months, during which time your child will not be able to access the financial support you intended for them.

To avoid this, you can set up a trust for your child and name the trust as the beneficiary. You can set up a life insurance trust and have a trustee oversee the funds and distribute the money according to your wishes. You can also create an irrevocable life insurance trust if you want to reduce estate taxes and leave a larger inheritance. Trusts help your heirs avoid probate court and its associated costs and delays.

If you are unable to set up a trust, you can name a custodian to help your minor child claim and manage the death benefit. A custodian is responsible for claiming the death benefit on your child's behalf and will manage the money until your child turns 18.

Choosing beneficiaries with special needs

Choosing beneficiaries is an important step in owning a life insurance policy. While almost anyone can be a life insurance beneficiary, there are certain considerations to keep in mind when choosing beneficiaries with special needs. Here are some key points to consider:

• Understanding the Impact of Government Assistance: It is important to recognize that naming someone with special needs as your beneficiary could impact their eligibility for government assistance. Leaving them the life insurance payout directly may trigger laws that reduce their financial support from government sources.
• Establishing a Special Needs Trust: To avoid negatively impacting the government assistance received by your beneficiary with special needs, consider establishing a special needs trust. By naming this trust as the beneficiary, you can channel your assets or the life insurance death benefit to your intended recipient without compromising their access to government support. Consult an attorney specializing in estate planning to explore this option further.
• Providing Detailed Information: When designating your beneficiary, be as specific as possible. Include the full legal name, Social Security number, relationship to you, date of birth, and address of your beneficiary. This ensures that the insurance company can locate and verify your beneficiaries efficiently, facilitating a faster payout.
• Considering Other Options: If you have multiple potential beneficiaries, carefully weigh the advantages and disadvantages of choosing an individual versus a trust or charitable organization as your beneficiary. Remember that you can also divide the death benefit among multiple beneficiaries, provided the total percentage equals 100%.
• Regularly Reviewing and Updating Your Beneficiaries: Keep your beneficiary designations up to date, especially after significant life changes such as marriage, divorce, childbirth, or the death of a loved one. Review your beneficiaries periodically to ensure that your choices align with your current circumstances and intentions.

Naming charities as beneficiaries

Identify the Cause You Want to Support:

It is important to carefully choose the charity you want to support. Consider the organizations that align with your values and have a meaningful impact. Research different charities and their work to find one that resonates with you. You can also consider the scope of their work, whether you want to support a local chapter or the broader national/international mission.

Obtain Necessary Information:

Once you have identified the charity you wish to support, obtain their full legal name, EIN (Employer Identification Number), and other relevant contact information. This information is typically available on the charity's website or can be found on aggregator sites like Charity Navigator. Having accurate details ensures that your donation reaches the intended organization.

Understand the Tax Implications:

When naming a charity as a beneficiary, it's important to note that there are generally no federal or state tax benefits associated with this decision. Consult with a financial advisor or tax expert to understand the tax implications, especially if you're considering donating a permanent life insurance policy, as there may be different strategies to explore.

Reach Out to the Charity:

Consider contacting the charity to ensure that your gift is planned correctly and to clarify any specific uses or restrictions for the donation. By reaching out, you can also confirm the correct legal name and EIN, ensuring the donation is directed to the right place. This step can also make things easier for your loved ones later on, avoiding potential complications.

Specify the Percentage of Payout:

When naming multiple beneficiaries, you can allocate specific percentages of the death benefit to each beneficiary. You can choose to give a certain percentage to your charity of choice, while also providing for your family or other beneficiaries. Ensure that the total percentages add up to 100%.

Update and Review Your Beneficiaries:

Remember to keep your beneficiary designations up to date, especially after significant life changes such as marriage, divorce, or the birth of children. Review and update your beneficiaries periodically to ensure that your wishes are accurately reflected and to avoid any complications in the future.

By following these steps, you can effectively name charities as beneficiaries of your life insurance policy, allowing you to support meaningful causes even after your passing.

Changing beneficiaries after a divorce

Divorce is a significant life event that can impact your life insurance policy. It is important to review your life insurance and make the necessary changes to protect yourself and your family financially. Here are some things to consider when changing beneficiaries after a divorce:

• Update beneficiaries: Most married people list their spouse as the primary beneficiary on their life insurance policy. After a divorce, you may want to remove your ex-spouse as a beneficiary, especially if there are no children involved. Contact your life insurance agent to verify if your policy is revocable and redesignate your beneficiary.
• Account for cash value: Some life insurance policies, such as whole life and universal life policies, accumulate cash value over time. The cash value from a life insurance policy represents part of your net worth as a couple and should be listed among the marital assets to be divided. You can cash out your policy and split the proceeds with your ex-spouse, or divide the policy's cash value in another way.
• Protect alimony and child support: If you have primary custody of your children and receive alimony or child support, consider maintaining a life insurance policy on your ex-spouse. This will protect you financially in the event of their death before your children turn 18.
• Take out a new policy: If you become a single parent after the divorce, it is important to take out a life insurance policy on yourself to protect your children or other dependents. Calculate how many years you have until your youngest child turns 18 or 21 and multiply this number by your annual income to determine the minimum benefit amount.
• Consult a lawyer: The laws regarding life insurance and divorce vary by state, and a qualified divorce lawyer can advise you on how life insurance impacts your specific situation. They can also help you understand the terms of your divorce decree and whether you are required to keep your ex-spouse as a beneficiary.
• Name a new beneficiary: After your divorce, you may want to name your child as the beneficiary of your life insurance policy. However, most states prohibit minors from accepting life insurance death benefits. If you pass away before your child turns 18, the death benefit payout will likely be held up by the court system. To avoid this, you can appoint a custodian and create a trust to manage the funds. Alternatively, you can consider leaving the death benefit to other relatives or making beneficiary designations to charities or causes you care about.

Frequently asked questions