By Stacy Williams
Purchasing a life insurance policy may help your family in the event of your passing. A life insurance policy can help by paying out benefits to those you’ve chosen as beneficiaries.
This article will help explain what a beneficiary is and provide some tips that may help you decide who or what to name as one.
What is a beneficiary?
A beneficiary is the person, people, or entity to which a life insurance policy’s death benefit is paid, provided:
- – The insured’s death occurs during the policy’s coverage period and
- – The insured is up-to-date on premium payments
Who or what can be named a beneficiary?
The following can be named as a beneficiary:1
- – One person
- – Two or more people
- – The trustee of a trust you’ve set up
- – A charity
- – Your estate
What are the different types of beneficiaries?
There are primary and contingent beneficiaries.
Primary beneficiary
The primary beneficiary is the first to receive the death benefit payable in the amount and method outlined by the insured’s life insurance policy, provided they can be found after the insured’s death.1
Contingent beneficiary
A contingent beneficiary receives the death benefit payable in the amount and method outlined by the insured’s life insurance policy, provided the primary beneficiary can’t be found after the insured’s death.1
Types of contingent beneficiaries
- – Secondary beneficiary — The secondary beneficiary would benefit from the life insurance payout if the primary beneficiary died before the insured or could not be located.
- – Tertiary beneficiary — If the primary and secondary beneficiaries die before the insured or cannot be located, the tertiary (third) beneficiary would receive the funds.
What happens if I don’t choose a beneficiary?
If you do not select a beneficiary, or if all your beneficiaries pass away before you do, the benefit will be issued pursuant to the terms of the policy.
In most cases, the benefit will be payable to the Estate of the Insured or the Estate of the Owner. Then depending on the laws in your state, you may need to probate the estate in order for the probate judge to determine how and to whom the estate assets are to be distributed.
There is a possibility that your estate — including your life insurance policy’s death benefit — will be taxed and/or subject to executor’s fees if it enters into probate. Probate laws and associated fees vary by state.
How to choose your life insurance beneficiary(s)
You may be considering having a primary, secondary, and even more contingent beneficiaries an important part of planning for you and your family’s future.
Here are some tips that may help you choose your life insurance beneficiary:
- – Identify your priorities.
Ask yourself who you currently support financially. Do you want them to continue to be provided for financially if you were to pass?- Family — You may want to ensure that your family’s support continues for expenses such as college, weddings, or to pay off your mortgage. Maybe you want to leave a legacy to your children or grandchildren, helping to set them up for financial independence in their futures.
- Charity — Depending on the laws in your state, you may be able to designate a charitable interest as a beneficiary to leave the proceeds of your policy to a worthy organization such as a charity, non-profit, or church.
- – Specify your beneficiary clearly.
Include your beneficiaries’ full legal names, relationship to the Insured, and percentage share of the Insured’s death benefit. This may help your life insurance company find them as quickly and easily as possible, which may help your beneficiary receive the life insurance death benefit in as timely and efficient a manner as possible.1 - – Keep your choices up-to-date.
You may choose a primary beneficiary who dies before you. If your primary beneficiary dies before you, don’t forget to update your choice of beneficiary. If your beneficiary’s address changes, update their contact information. - – Have a contingency plan.
Detail how the death benefit should be divided if you have multiple beneficiaries, per the Insurance Information Institute. - – Avoid designating a minor as a beneficiary.
Some states don’t allow minors to receive the full amount of benefits from life insurance proceeds — or any proceeds at all. One way to avoid this is by setting up a trust for your child. Another option is setting up a Uniform Transfers to Minors Act (UTMA) account. Per SI 01120.205, under the UTMA, “any kind of property, real or personal, tangible or intangible, can be transferred to a custodian for the benefit of a minor.” - – Take divorce into consideration.
Depending on your state, the designation of an ex-spouse as a beneficiary under your life insurance policy may be automatically revoked upon divorce.
This is not a comprehensive list of considerations to make when choosing a life insurance beneficiary.
Carefully consider who or what you would like your beneficiary to be.
A beneficiary is the person, people, or entity to which a life insurance policy’s stated death benefit is paid, provided the insured’s death occurs during the policy’s coverage period, and the insured is up-to-date on premiums paid. There are primary and contingent beneficiaries.
Some tips detailed above that may help you choose your life insurance beneficiary include:
- Identify your priorities.
- Specify your beneficiary clearly.
- Keep your choices up-to-date.
- Have a contingency plan.
- Avoid designating a minor as a beneficiary.
- Take divorce into consideration.
For more information about life insurance, contact one of our knowledgeable agents at 713.254.3439 or email us at info@jsuttonfinancial.com.
