Naming a life insurance beneficiary is a choice that comes with many things to consider. You want to be sure everyone you love is covered, but this isn’t always possible. Thankfully, these are some tips you can use to pick the best beneficiary for your life insurance policy.
Assign a Contingent Beneficiary
Many people don’t consider assigning a contingent beneficiary when they set up their life insurance policy. When you designate a beneficiary, they’re known as the “primary” beneficiary. This is the person who’s first-in-line to receive the benefits from your policy. Should that person be unavailable, you can assign a “contingent” beneficiary who is second-in-line to receive your benefits. This would come into play if your primary beneficiary passed away or was unavailable to accept the inheritance. Without a contingent beneficiary, your benefits may be unable to find a suitable person, or the matter could go to the courts where a stranger decides who receives your assets.
Consider the Language
Beneficiaries can be listed by name or through class, such as “children of the insured.” However, complications can arise from the language that you choose to use in your policy. For example, stating that “all children in this marriage” should receive an equal portion of the assets could result in a kid from a previous marriage or an adopted child not receiving their portion of the inheritance. When in doubt, it’s always better to list beneficiaries by name to avoid confusion.
Remember Beneficiaries Circumstances
Life insurance policies can pay out large sums of money once you pass. While most people may see this as a gift, it could put some others in a bind. For example, say a family member receives government benefits due to disability and can only receive a certain amount of income annually. A life insurance policy could cause them to lose their government benefits. It’s always important to consider the circumstances of your beneficiary before listing them in your life insurance policy.
Avoid Minors
It’s natural for a parent to want to care for their child in the event of their death, but minors are often ineligible to receive life insurance benefits in the event of your passing. This means that, unless the state deems them an adult, the funds could go to a guardian. This guardian could be an ex-partner or simply someone who doesn’t spend wisely, which could result in little inheritance left once the child grows to be an adult. If you want to give money to your child, consider utilizing a trust.
Update Your Beneficiary Regularly
One of the biggest mistakes people make when assigning a beneficiary for their life insurance policy is failing to update it on a regular basis. “Regularly” can be subjective for each person, but everyone should update their life insurance during major life events. This includes events like marriage, the birth of a child, and divorce. Without checking regularly, you could inadvertently give your life insurance policy to an ex-partner, especially since what you list on your policy trumps whatever you put in your will. Be sure to read over your policy at least yearly to ensure it reflects the most current information.
