Beneficiary Basics: Vehicle Insurance

A beneficiary on vehicle insurance is a person or entity that receives the benefits of the insurance policy in the event of the policyholder's death. It is important to designate beneficiaries to ensure that your financial assets are distributed according to your wishes. You can name primary beneficiaries, who are first in line to receive the benefits, and contingent beneficiaries, who will receive the benefits if the primary beneficiary is no longer alive or cannot be located. Choosing beneficiaries can be challenging, but it is important to carefully consider your unique circumstances and select individuals who may suffer financially from your loss.

Who can be a beneficiary?

A beneficiary is a person or entity that you legally designate to receive the benefits from your financial products. While beneficiaries are often named in life insurance policies, some drivers are unaware that they can be a part of car insurance policies, too. A car insurance beneficiary is usually named in a policy that provides death or funeral benefits, which are special types of car insurance coverage.

A 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. If you are a resident of certain states, you may be required to list your spouse as your primary beneficiary and designate them to receive at least 50% of the benefit. In some states, you can name someone else with your spouse's written permission.

When it comes to car insurance beneficiaries, there are a few things to keep in mind. Firstly, not all car insurance companies offer funeral or death benefits, but the vast majority do. Secondly, if you already have a life insurance policy that provides funeral benefits, a car insurance policy that names a beneficiary may be unnecessary. However, for those without life insurance, naming a car insurance beneficiary can be a smart move as it protects your loved ones from a major financial burden.

• Married with kids: In this case, naming a spouse as the primary beneficiary is the most common choice. This way, your partner can use the proceeds of the policy to help provide for your children, pay the mortgage, and ease the economic hardship that your death may bring. Don't forget to also include contingent beneficiaries, who would usually be the parents or designated guardians for the children.
• Married with no kids: Most people in this situation list their partner as the primary beneficiary and a parent as the contingent beneficiary. Other options include a charity, family members you financially support, a close friend, or a sibling.
• Single parent: You may want to name a child as a beneficiary, but it's important to note that life insurance companies cannot pay out a policy to a minor. Instead, you can name a trust as a beneficiary on behalf of your child or a trusted family member who has the best interests of your child in mind.
• Single with no kids: If your parents or another family member co-signed a mortgage, student loan, or car loan, naming them as a beneficiary will help them shoulder the financial burden if you were to pass away. You can also consider naming someone who would likely take the lead in making funeral arrangements.
• Multiple financial obligations to family members: You don't have to choose just one beneficiary. You can choose multiple primary beneficiaries and designate how much of the death benefit each would receive.

Remember, you can always change your beneficiary as your life circumstances change. It's important to keep your beneficiary designations up to date and review them periodically.

How to choose a beneficiary?

Choosing a beneficiary is an important step in owning a life insurance policy. A beneficiary is the person or entity that you legally designate to receive the benefits from your financial products. While there are almost no rules restricting who you can pick, there are some key considerations to keep in mind when making your decision.

Firstly, it is essential to understand the different types of beneficiaries. There are primary beneficiaries, who are the first in line to receive the death benefit if you pass away, and contingent beneficiaries, who are the backup option if the primary beneficiary is no longer able to receive the benefit. You can also have multiple beneficiaries and choose how much of the payout each party receives.

When choosing a beneficiary, it is important to consider who relies on you financially and would need help paying ongoing bills or covering costs incurred by your death, such as funeral expenses. You may also want to leave money to a charity or create a trust for your children. It is recommended to be as specific as possible when designating a beneficiary, including their full name, Social Security number, relationship to you, date of birth, and address.

If you have children and want to name them as beneficiaries, keep in mind that life insurance companies cannot pay out a policy to minors. In this case, you can appoint a legal guardian to receive the payout on their behalf or set up a trust for them.

Remember to review and update your beneficiaries as your life circumstances change, such as getting married, having children, or experiencing the death of a beneficiary. Additionally, if you live in a community property state, there may be specific requirements for obtaining your spouse's consent to designate someone else as a beneficiary.

Finally, consider consulting with a legal or financial professional to ensure that you are making the best decision for your unique situation and that all the necessary documentation is in order.

What happens if you don't name a beneficiary?

While it is not mandatory to name a beneficiary, it is usually the reason people buy vehicle insurance in the first place—to provide a benefit to the people they care about. 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, 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.

Most life insurance policies have a default order of payment if you do not name a beneficiary. For many individual policies, the death benefit will be paid to the owner of the policy if they are different from the insured person and still alive; otherwise, it will be paid to the owner's estate. For group insurance policies, the order typically starts with your spouse, then your children, then your parents, and then your estate.

If there is no default order specified in your policy, the payout may be paid to your estate or held in probate. In some states, money paid to your estate can be claimed by creditors.

How to change a beneficiary?

Changing the beneficiary on your vehicle insurance is a straightforward process, but it's important to keep your policy up to date, especially after major life changes. Here is a step-by-step guide on how to change your beneficiary:

• Contact your insurance company: Get in touch with your insurance provider to initiate the process of changing your beneficiary. You can do this by calling your insurance agent or company directly. They will guide you through the necessary steps and provide you with the required forms or online portals to make the change.
• Fill out the necessary forms: Most insurance companies will require you to complete a change of beneficiary form. This form will include basic information such as the policyholder's name and the new beneficiary's details. You may also need to provide the reason for the change. If the change is due to the previous beneficiary's death, you might need to include a copy of their death certificate.
• Submit the form for approval: Once you have completed the change of beneficiary form, submit it to your insurance company for approval. They will review your request and inform you if the change has been approved.
• Inform your new beneficiary: After your insurance company has approved the change, it is a good idea to inform your new beneficiary about the policy and let them know where to find the relevant coverage documents. This will help them file a claim if needed.
• Review and update regularly: Keep your policy up to date by regularly reviewing and adjusting it after any significant life changes. This could include events such as getting married or divorced, having children, or experiencing the death of a beneficiary.

It's important to note that only the policyholder can change the beneficiary, and this can be done at any time as long as the policy is active. Additionally, remember to be as specific as possible when designating a beneficiary to avoid any confusion. Include the beneficiary's full name, Social Security number, relationship to you, date of birth, and address if possible.

Common mistakes when naming a beneficiary

When it comes to vehicle insurance, a beneficiary is the person or entity that you legally designate to receive the benefits from your policy or account in the event of your death. While this is a straightforward process, there are several common mistakes people make when naming a beneficiary.

Failing to Name a Beneficiary

Not naming a beneficiary is a common mistake, and this can cause unintended consequences. If no beneficiary is named, the proceeds will typically pass to your "estate" or "heirs at law", which may include individuals you did not intend to receive the benefits. This can also result in delays and expenses associated with settling an estate, and the funds may be attached by creditors.

Naming a Minor as a Beneficiary

Naming a minor child as a beneficiary is not advisable. In most cases, insurance companies will not pay life benefits directly to a minor. If there is no trust or legal guardian established to manage the money on their behalf, the court will appoint one. This can result in delays and additional costs. Instead, it is recommended to set up a trust for the benefit of the child and name the trust as the beneficiary.

Not Updating Beneficiary Designations

It is important to regularly review and update beneficiary designations, especially after significant life changes such as marriage, divorce, the birth of a child, or the death of a loved one. Failing to update beneficiary information can result in benefits being distributed to an ex-spouse or other unintended individuals.

Lack of Specificity

When naming beneficiaries, it is crucial to be as specific as possible. Simply listing "my children" or "my spouse" is not sufficient. Provide the full legal names of the beneficiaries, along with any other relevant information such as Social Security numbers or dates of birth. This helps ensure that the correct individuals receive the benefits and avoids any confusion or disputes.

Not Considering Tax Implications

While life insurance proceeds are generally tax-free, there can be tax implications if the policy is set up with different owners, insured, and beneficiaries. In some cases, the death benefit may be considered a taxable gift. Consulting a financial professional can help structure the policy to minimise potential tax liabilities.

Frequently asked questions