- The beneficiary is the person who will receive the payout from your life insurance policy if and when you pass away.
- You can choose multiple beneficiaries and designate a certain percentage of the death benefit for each.
- You’ll want to select a contingent beneficiary as well as the primary one, in case the primary one dies before you do or cannot be located.
- Your first instinct may be to choose your child as your life insurance beneficiary. But if your child is a minor, you may want to choose an adult relative or set up a trust instead.
- When you pass away, your beneficiary will have to file a claim against your policy to collect the death benefit. They’ll then choose how to receive the payout.
When you buy a life insurance policy—or opt into coverage through your employer—one of the first decisions you’ll have to make is whom your beneficiary will be.
The beneficiary is the person who will receive your life insurance policy’s death benefit if and when you pass away. For many people, choosing a beneficiary is simple. After all, the point of life insurance is to provide for family members who depend on your income. So when it comes to choosing a beneficiary, you’ll likely pick one of the people you had in mind when you took out the policy.
But there are still some considerations you need to make when choosing a life insurance beneficiary.
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Who can be a life insurance beneficiary?
One of the main life events that prompts people to purchase life insurance is the birth of a child. So your first instinct may be to choose your child as your life insurance beneficiary. But if your child is younger than 18, you may want to think twice.
“It is possible to name a minor as a beneficiary to a life insurance policy, though it should be avoided as it can lead to complications,” says Sergio Garcia, a Certified Financial Planner at BFS Advisory Group. “A minor cannot receive and control the proceeds directly, and a judge will appoint a guardian to manage the funds until the beneficiary reaches the age of majority.”
Appointing a legal guardian for the purposes of managing a life insurance payout after your death can take a lot of time—and a sizable chunk of cash. If you want your policy’s death benefit to go your minor children, you may be better off choosing either your spouse or a trusted family member or friend who will use the money for the child’s benefit.
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Your beneficiary doesn’t necessarily have to be a person. When you’d like your life insurance payout to go to your child, for example, you can use a trust to hold the funds until your minor child no longer needs a financial guardian, says Garcia.
You name the trust as the beneficiary and a trustee to oversee the trust and ensure that your wishes are carried out. In the trust document, you can prescribe exactly how you’d like the money to be used.
A business is another example of a life insurance beneficiary that’s not a person. If you run a small company with a partner, making that business your beneficiary could help with a transition if you were to pass away. You can also name a charitable organization as the beneficiary of your life insurance policy if you’d like to make a sizable donation after your death, says Garcia.
Can I have more than one life insurance beneficiary?
It’s common to name multiple people as beneficiaries on your life insurance policy, says Garcia. “Insurance policies allow policy owners to designate how the proceeds should be split, as a percentage,” he says. For instance, you could direct 90% to your spouse and the other 10% to a sibling.
Additionally, you’ll want to make sure that you select both a primary beneficiary and a contingent beneficiary for your policy.
“The primary beneficiary is first in line to receive insurance proceeds,” says Garcia. “In the event the primary beneficiary passes away first, the contingent beneficiaries are next to receive insurance proceeds.” When there are no living beneficiaries, your death benefit would generally become part of your estate.
Can I change the beneficiary on my life insurance policy?
There are two types of life insurance beneficiaries: revocable and irrevocable. The type you choose will determine whether or not you can update your beneficiary during your lifetime.
If you select a revocable beneficiary, you can change your beneficiary later. This is the more common option. Alternatively, if you choose an irrevocable beneficiary, you won’t be able to switch the beneficiary without that person’s permission.
How to choose a life insurance beneficiary
In many instances, choosing a life insurance beneficiary is as easy as asking yourself who currently relies on you financially and will need the money after you are no longer here and providing an income. If that person is young or you’re nervous about how they might handle a large lump sum of money, you can set up a trust with rules for how the money is used and distributed to the beneficiary.
But there are also state and federal rules and laws that can affect your choice.
For instance, if you’re married and live in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), you’ll have to get your spouse to sign off on your choosing someone other than them as the beneficiary to your life insurance policy.
Garcia says that you should also be careful not to create unintended consequences when choosing a life insurance beneficiary. For instance, he notes, “naming an individual with special needs or on Medicaid may be disruptive to the financial support they receive from government programs.”
How the payout process works
As long as your life insurance policy is in good standing when you pass away, all your beneficiary or beneficiaries will have to do to collect the death benefit is file a claim and submit a copy of your death certificate.
The good news is that the process is typically quick and easy—beneficiaries usually receive the money within a month or two. But if the policy is still in what’s called the contestability period, which is usually the first two years, the insurance company may investigate to make sure that you weren’t obscuring anything about your health when you bought the policy. This kind of investigation can delay the payout.
Once the claim is approved, the beneficiaries will have to choose how to receive the death benefit: a lump sum, monthly or annual payments for a set period of time, an interest-earning account guaranteed by the insurance company or an annuity.
The decision of who to name as the beneficiary of your life insurance policy shouldn’t be made lightly. To ensure that the money goes toward supporting all the people who depend on your income today, be sure to choose someone you trust. And as time passes and your life changes, update your beneficiaries accordingly.