If you read any classic detective fiction, or watch television crime drama with any regularity – and who doesn’t? – it would appear that naming a beneficiary for your life insurance is rather like painting a huge target on your back.
Not so! In fact, sorting out your beneficiaries is a really important part of the life insurance process. The beneficiary is the person, or people, or financial entity (trust, estate, charity) you name in your life policy or annuity contract as the recipient of the proceeds upon your death. In short, it’s who gets the money.
There are a couple of things to keep in mind, here. The insured is the person on whose life an insurance policy is issued. The policy owner/holder is the owner of that policy – and this may or may not be the actual insured. The policy owner may be a relative of the insured such as a husband or wife, or a non relative, a business partnership or corporation.
If you are indeed the policy owner, then you choose the beneficiary. Some guidelines:
- Always, always, always name at least a primary beneficiary as well as a secondary beneficiary. And a final beneficiary is not a bad idea, either. Your primary is your ideal choice; the secondary and final are there should the primary beneficiary predecease you. This happens, by the way.
- Selecting a beneficiary is personal. Ask yourself who will suffer financially from your death. Have you a friend or family you support? Who will pay for your funeral and how will they pay for this? Is there someone meaningful in your life you would like to acknowledge?
- Be specific in wording beneficiary designations. Note that saying “wife of the insured” could mean an ex-spouse gets the check. Naming specific children could eliminate any child born later, and so on.
- Naming specific beneficiaries, rather than having the proceeds paid to your estate, is the best plan. This means the family or friends are paid immediately. If the proceeds go to an estate, it will have to be probated along with your other assets.
- A beneficiary must be 18 years old or older. If you are concerned about young children, the policy payout can go to a trust that the children can access at a certain age. This trust will need to be administered by someone you can count on.
- If you leave your policy payout to an entity such as a church or school, you must specify who at that entity will be in charge of seeing that the funds are used as you have directed.
- Changing beneficiaries is easy – just do it! You must own the policy to change beneficiaries and your agent can help you, but essentially, all that is involved is filling out a form, signing it and submitting it to the life insurance company. Your signature will need to be notarized; changes to the policy take place as soon as the form is processed by the carrier.
- Why change a beneficiary? Lots of reasons: marriage or remarriage, the birth of a child, a divorce, a change in life philosophy, a relationship gone sour, and so on. Choosing a beneficiary is personal; so is changing one.
One last word: it is very important to choose a beneficiary. If you do not, the state you live in will get that payout. And should you have any debt or owe on anything, the state will settle those debts and pocket the rest of the money. I cannot imagine why anyone would want this to happen!