Untimely death and dealing with what happens to those left behind are pertinent topics in this post-pandemic world. Perhaps this is the first time you’ve seriously looked at life insurance policies, or maybe you realize it’s time to reexamine one you already have.
Choosing the right beneficiary can make all the difference when it comes to life insurance. You could have a great policy, but what’s the point if it’s entrusted to the wrong hands? You pay for this policy, so make sure it serves your purpose.
Did you know you can name more than one person on your policy? Do you know what happens if your primary beneficiary dies before you? Do you even know what a tertiary beneficiary is? Here’s what you need to consider when you name your beneficiary.
Who would financially suffer in the event of my death?
This may come as a surprise, but life insurance isn’t just a chance for someone to get rich from your death. More importantly, who would financially suffer as a result of your death? Who will be paying for your funeral expenses or settling your debts?
Your primary beneficiary is the person who will receive funds from your life insurance policy in the event of your death. These funds are separate from probate that your estate will be subject to. So, if you think your loans end at death, think again. Life insurance can help whoever is left behind with your financial obligations.
When you consider life insurance policies, an excellent place to start is who will be left responsible for your outstanding debts? Immediate family usually foots the bill on car loans or mortgage payments. The advantage of life insurance is that those funds are immediately available for use, provided your beneficiary is alive and actively involved.
Your long-term insurance policy goals extend beyond debts and funeral expenses. How long can your dependents continue their standard of living? How long do you foresee life insurance funds facilitating a transition for them? The person responsible for facilitating your dependants’ transition period would be a good choice for your primary beneficiary.
If no one is financially dependent on you or you have no outstanding debts, consider a charity or someone who would honor your passing with the funds provided. If you are sitting there and still no one comes to mind, back up and ask yourself, do I need this policy?
What stage of life am I in?
Your stage in life will help you narrow down beneficiary options. For example, if you are single and have no committed interests, a close family member who will devote the time to settling your affairs would be a great candidate.
If you are married, it seems obvious to pick your spouse, and it’s a solid place to start. But in the event of a divorce, make sure you rewrite this policy ASAP.
You can divide your policy to distribute to as many beneficiaries as you want, splitting funds between spouse and children, child and guardian, any number of combinations.
If you have kids, consider who their legal guardian will be. Also, calculate whether your life insurance policy is enough to cover the guardian’s initial burden of taking in your children. This calculation is critical because a considerable amount of time may pass before your estate is settled. Remember, life insurance funds are almost immediate.
Perhaps you are taking care of aging parents. Sometimes naming them as your beneficiaries is a good idea. If a care facility is in their future, keep in mind any of your policy funds they receive will be factored into their assets. If your parents need care, who will be taking care of them in your absence? That person may be a candidate to consider.
Why should I specify a contingent beneficiary?
Your policy will most likely require you to name a secondary or contingent beneficiary. This is wise in the event you die with your beneficiary, or your beneficiary precedes you in death.
But did you know you can also name a tertiary beneficiary? It may sound extreme, but if you picture yourself ever driving in the car with your primary and secondary beneficiaries, you could all die simultaneously. If such is the case, naming a tertiary would prevent any gray areas that could mess with the immediate access to your policy.
Contingent beneficiary guidelines follow the same options as primary. For example, you could choose a single primary but have multiple contingents with a percentage of the policy designated to each. You can even specify whether the beneficiary’s heir will simply inherit your policy if the beneficiary is gone.
Can I change my life insurance beneficiary?
You can change your beneficiary at any time. As your stage in life changes, the goal of your policy will change, and your beneficiary may change as well. For example, are your children out of the house? The person previously named their guardian probably no longer needs your life insurance money.
Divorced? Make sure the wording of your beneficiary accurately represents who should get your funds. An ambiguous “spouse of deceased” opens the door to any of your previous spouses claiming rights.
Proper estate planning can significantly aid this entire process. Your estate attorney will know your life insurance policy or policies, and hopefully, the right people will be alerted to your death and their role.
Try to facilitate an easy transition for those who will be emotionally strained at your passing. Your death should not be the time for estranged children to raise drama or ex-spouses showing up for a handout. Properly worded and updated beneficiaries on a policy can be a blessing to those left behind. Your estate attorney will provide the best guidance for that legal wording.
How will my beneficiary know I chose them?
One last step here, and probably the most important one, is to inform your beneficiary of their position.
Unfortunately, it happens more often than it should that the deceased’s beneficiary doesn’t know of their role, especially if they are a minor beneficiary or child of the policyholder or if the policyholder is in prison or somewhere where they can’t share information easily. So call your beneficiary even before you name them.
It may be surprising to you that people skip this step. Newspapers publish lists of missing beneficiaries every day. There are entire state administrations in charge of holding forgotten assets. You can even search unclaimed policies on a website database. All this to say, beneficiaries do not always know about their position on a life insurance policy.
Your primary beneficiary will probably know about your death before your life insurance company finds out. As long as you inform them about your policy, they can immediately contact the insurer and access those funds.
Choosing your primary beneficiary or beneficiaries is an integral part of your life insurance shopping. The purpose you pay for your policy is to benefit this specific person or people.
Consider the following questions carefully:
- Who will financially suffer if I die?
- What stage in life am I in?
- Who can be a contingent beneficiary for my policy?
If you have no answers to these questions, you might pause to consider why you need a life insurance policy in the first place.
Maria Hanson writes and researches for life insurance comparison site, QuickQuote.com. She is passionate about helping people understand their life insurance options and how they can ensure their policy works for them.