How to choose a beneficiary
Selecting a life insurance beneficiary is a crucial part of the life insurance process. A beneficiary is the person or entity who receives the death benefit if you pass away while your life insurance certificate is still in force. A life insurance death benefit can be used to help pay off your remaining debts and funeral expenses, but it can also help replace income, cover loved ones’ daily expenses, and other financial needs.
By carefully selecting who you are going to name as your beneficiary, you can help ensure your legacy is protected after you pass away.
Who Can Be a Beneficiary?
When you’re purchasing life insurance, your advisor will ask you to pick a beneficiary or beneficiaries as part of the application process. Here is some basic information to help you get started.
Family members: Many certificate holders select their spouse, children, or other close family members.
Trusts: Establishing a trust as a beneficiary can help manage the funds according to your specific terms.
Charities: You may choose to name a charitable organization as your beneficiary.
Estates: Naming your estate can allocate the proceeds as outlined in your will, though this may have tax implications.
If you have several people you want to protect financially, you can choose multiple beneficiaries and arrange to divide your death benefit between them. There are two different kinds of beneficiaries: primary and secondary (also called contingent) beneficiaries.
Primary beneficiary
A primary beneficiary is the person, people, or entity you wish to receive the life insurance death benefit first. If you have more than one primary beneficiary, you can choose what percentage of the death benefit to allocate to each.
Secondary beneficiary
Secondary (or contingent) beneficiaries would receive the death benefit only if all of your primary beneficiaries pass away before you or can’t be located. You can assign one or more secondary beneficiaries and also choose how to divide the death benefit among them.
Other Considerations
Age of the Beneficiary: If the intended beneficiary is a minor, it’s important to designate a custodian, acting-guardian, or trustee until they reach legal age.
Multiple Beneficiaries: Life is full of curveballs. If you are inclined to leave your death benefit to one person, you may want to consider designating a contingent beneficiary.
Changes in Circumstances: Regularly review your beneficiary designations to align with life changes such as marriage, divorce, or the birth of a child. If you are making changes and also have your life insurance policy included in your will, make sure your beneficiary elections match.
Legal and Tax Implications: Talk to a financial advisor to understand how your decision may affect the distribution of your assets and potential tax liabilities for your beneficiaries.
Communicate Clearly
It is crucial to communicate with your beneficiaries clearly and in writing. It’s helpful for your beneficiary to know about your life insurance ahead of time so that they know what to expect and who to contact when you pass away.
By ensuring that you designate a beneficiary and by keeping it up to date, you can have better peace of mind in knowing that your life insurance proceeds are being paid out to those you intended it for. If you think about it, the person or people you have designated as beneficiaries are often the reason you’ve purchased life insurance in the first place!
And, on the other hand, by not having a designated beneficiary or a back-up (contingent) beneficiary, you could run the risk of your life insurance proceeds being turned over to your estate, possibly causing your loved ones to spend more time and money in order for the distribution of the funds to be determined.
Designating a beneficiary requires thoughtful deliberation and understanding the financial and emotional facets involved. Carefully choose your beneficiaries, engage in transparent communication, and regularly revisit your choices to reflect changes in your life.
TRN00050 Rev. 5-2024
This article is for informational purposes only, you should not construe any information provided as legal, tax, investment, or financial advice. No reader should make any financial decision without first consulting their own financial advisor and conducting their own research and due diligence.
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