Beneficiary selection is an important part of the purchasing process of a life insurance policy. Getting this correct is essential as, by the very nature of the plan, you will not be there to give the money to your loved ones on your own. In this article, we provide you with a guide on how to choose a beneficiary for your life insurance policy.
1. Think about who you would like to support
The purpose of purchasing a life insurance policy is to financially support your loved ones.
Some life insurance policyholders would like to leave behind the death benefit for their spouse or kids following their premature demise whereas others might use a life insurance policy to pay off their mortgage or debts.
It is best to consider who really needs financial support, the amount of money they need and whether they are able to take care of the life insurance payout once they receive it.
Therefore, the beneficiary you decide to choose has to be someone you are most worried about and someone who you can trust to use the death benefit to address any financial burdens they may have.
2. Be mindful of your beneficiary choices
There are many beneficiary options that you can choose. In fact, your beneficiary can be something else rather a person. For example, it can be a trust, a charity, an estate or a legal agreement that allows you to put property under the control of a trust manager.
A trust will come in handy the most when you would like your death benefit to go to your minor kids. Typically, minor children do not have the right to receive the death benefit directly from the payout of the life insurer.
In this case, you need to establish a trust and designate a trustee or a guardian who will take care of the money until the kids turn 18 or 21 depending on the country you live in. This is vital because if you do not do this, the courts will designate a person that they select on their own to administer the life insurance payout.
It is best not to choose your estate as your beneficiary because this can be an opportunity for creditors to chase after your property in an estate which includes the death benefit from a life insurance policy.
If your family has the financial protection and you wish to have a legacy following your demise, then select a charity as your beneficiary.
3. Put yourself in the beneficiary’s shoes
In some cases, listing someone as your beneficiary for your life insurance policy could put that person in trouble. For instance, your family member is handicapped and their level of income allows them to receive specific government benefits.
However, once you list that person as your life insurance beneficiary and they are in a position where they get your life insurance death benefit, their level of income may rise to the stage where they do not qualify for their government benefits anymore.
So keep in mind that the situations of the beneficiary are as important to think about as those of you as the life insurance policyholder.
4. List a contingent beneficiary
Typically, when you select a life insurance beneficiary, you assume that the beneficiary will live longer than you. However, that is not always the case. There are times when your primary beneficiary dies before you so you need to assign a contingent beneficiary beforehand. This contingent beneficiary would receive the life insurance payout in stead of the deceased primary beneficiary.
5. Go through your life insurance policy frequently
Whenever you have a life-changing event such as a divorce, you may go on to disown kids and add new kids when you get married to a new spouse. If this happens, you may need to reconsider changing your life insurance beneficiaries.
If you do not want your ex-spouse and kids that you have with this spouse to receive the death benefit following your death, you need to review your life insurance policy to list new beneficiaries in place of the old ones.
6. Be careful with the language usage of the life insurance policy
There are two key ways that beneficiaries can be assigned: either by name or by class which refers to a group of individuals such as the grandkids of the insured. If you list your grandkids by name and you fail to update your life policy as soon as your youngest grandkid is born, the child will not get a share of the life insurance payout following your demise.
Another example is let’s say your life insurance beneficiary is all children born from this marriage, an adopted kid might not get his or her share of the death benefit.
7. Make sure your life insurance policy is in line with your will
You cannot just list the names of people who you would like the money to go to in your will. You need to be mindful of listing them in your life insurance contract itself.
The designation in your life insurance contract will win against that in your will.
On the whole, following the tips above is a great way to make sure you make the right decision in selecting the right beneficiary or beneficiaries so the life insurance payout can be put to great use and be spent on the right things such as paying off mortgage, clearing debts, covering tuition fees and used as financial protect so your loved ones can keep their lifestyle for a certain period.
After all, the only control that you have is when you list the beneficiary or beneficiaries.