Choosing your life insurance beneficiary is one of the issues that you cannot pay little attention to. Because, it is your choice that will make or mar the future of your beloved ones.
And you know, benefit and beneficiary are inter-related.
Perhaps you have the idea that insurance benefits come in two ways:
Living benefit; and,
While death benefit is the core benefit to almost all types of life insurance policies, living benefit is attached only to cash value insurance policies.
The living benefit comes to you while you are alive. Conversely, the death benefit goes to the person you choose past your death.
The very person you name to receive the policy benefit is your life insurance beneficiary.
Because you purchase insurance for people you care about, you need to choose your life insurance beneficiary or beneficiaries very carefully.
Beneficiaries are also known as nominees.
Do Beneficiaries Get Paid?
There are people out there, in millions across the globe who have had life insurance policy benefits. This is why, insurance companies are there. Or, they would be dead as the dodo. And, when there are benefits, there are beneficiaries.
Who Can Be Life Insurance Beneficiaries?
You may choose any one of the following persons or entities as your life insurance beneficiary:
Nephew or niece
Friend or partner
In fact, life insurance policy being a semi-legal contract between your insurer and you, you can virtually name anyone as your life insurance beneficiary.
If you are married and reside in a state where community property law is in force, you cannot make a third party your insurance beneficiary. You need your wife’s written consent for that.
States Where Community Property Law Is in Force
These are the 9 U.S. states where community law prevents you from ignoring your spouse:
Two states, Arizona and Tennessee, are places where following community property is optional for spouses.
Types of Life Insurance Beneficiaries
There are two types of life insurance beneficiaries: primary beneficiaries and secondary or contingent beneficiaries.
A primary beneficiary is the key person who you want your death benefit to go to. On the other hand, a secondary beneficiary is a back-up beneficiary. He/She will not receive the death benefit unless the first nominee is legally missing, no more or becomes ineligible.
Who Should Be Made Primary Beneficiary
While choosing your primary life insurance beneficiary, you should remain careful. Focusing on the following criteria during choosing the primary beneficiary can be wise:
Expected Life Expectancy
Although death is always uncertain, life expectancy is often not. While choosing your primary life insurance nominee, you should see to this aspect. While making spouse is inevitably the first choice and it should be, being discreet is important. If you have fears your spouse may not outlive you for medical reasons, you should find options so that the death benefit goes to the right person.
Responsibility and Reliability
The death benefit of life insurance brings in a huge amount of money to the beneficiary. So, you need to make sure that the person you are choosing is the right person. He or she should be reliable and responsible. Or, the purpose you are purchasing the insurance for will be fruitless. Instances of family feuds over life insurance benefits are not too few. Be sure that the beneficiary will not misuse or usurp the money.
Health, you know, means both mental and physical health. Both physical and mental fitness of the life insurance beneficiary are important. The person you choose should be without any kind of mental disorder. He or she should be physically healthy too. So, naming people with disabilities or health issues that make it impossible for them to move or live normally can be a mistaken decision.
Beneficiaries to your life insurance should not be someone with harmful habits. If you know the person has habits like gambling, drinking or even addictive shopping, you should avoid him or her. Else, the money will go to the wrong hand and those who need it will be deprived.
Knowledge of Finance
Being sure that the life insurance nominee has the knowledge of finance is important. Although lacking in this quality should not deprive someone from being a life insurance beneficiary, making sure that the money will be handled properly is important.
The person you choose as your life insurance beneficiary should preferably be educated enough for two reasons. He or she should be able to understand the policy documents and deal with the claims process. Sometimes nominees need to go through challenge or even legal process to receive the benefit. This is why education is important.
Who Should Be Made Secondary Beneficiary
The secondary beneficiary, we have already said, is a back-up nominee. He or she comes in view only when the primary beneficiary dies off or becomes legally ineligible to receive the benefit. This is why you need to be careful in choosing the secondary or contingent beneficiary too.
The Best Alternative
Your life insurance beneficiary back-up should preferably have all or most of the 6 qualities that we mentioned. You should see to that the secondary beneficiary is the best alternative to the first one.
The age of the secondary life insurance nominee should preferably be lower than that of the primary nominee. If the secondary beneficiary is older than the primary one and dies earlier, there will be none to claim the coverage if the primary beneficiary also dies. This why you need to think of the age.
Making the Right Decision
For those who need it, life insurance is a very essential and important issue. The future of the people who you love may much depend on it. So, making an educated decision is necessary. In order to avoid mistakes, you can follow the 12 don’t that will save your beloved ones from being deprived.
Don’t Go for Irrevocable Nominees
You have two options for choosing your life insurance beneficiaries:
If you change your mind for any reason and want to change the person you already named to benefit, you can do so when you opt for revocable beneficiary.
But when you select irrevocable nominee option, you cannot do so without the signed consent of the already named beneficiary. As life’s situations change and so do our decisions, it is good to go for the revocable option.
Don’t Designate a Class
There are two ways to designate a beneficiary for a life insurance policy. It is possible to declare any specific individual by name as heir as well as any group of people without specified names in the policy document. The second method is known as class designation. For example,you can choose the children as heirs to the benefit. It is advisable that you choose individual or individuals by name so that the life insurance beneficiary can avoid legal complications that may arise later on and require them to prove they inherit the benefit.
Don’t Name a Minor
If you are a single parent and you have a minor to choose as your life policy beneficiary, caution is necessary. Do not just fill in the form with the name of your child or children. Insurance companies will not pay the benefit directly to a minor. So it is necessary that you choose a legal custodian for your child. If there is none reliable enough to entrust the policy benefits with, you may go for a trust to do the job.
Don’t Choose One Beneficiary
To avoid being misunderstood, you might feel tempted to name only one person as beneficiary to your insurance plan. While this wins the heart of the person you name, the idea can be far from pragmatic. There will be none to receive the death benefit if the only beneficiary dies.
Don’t Keep It Secret
Some people buy life insurance, pay premiums regularly and keep the whole matter to themselves. There are many instances where the beneficiaries did not know insurers owed them. For example, CBSnews reported in 2016:
In a little-known series of settlements, 25 of the nation’s biggest life insurance companies have agreed to pay more than $7.5 billion in back-death benefits. However, about 35 insurance companies have not settled and remain under investigation for not paying when the beneficiary is unaware there was a policy, something that is not at all uncommon.
Don’t Keep Beneficiary Un-updated
Remember that your life situation change will not be automatically reflected in your policy later on because you have legal and factual back-up to provide. Insurers count the policy papers only. So, if you marry, divorce or have a new baby, you need to take steps to update the information on your own.
Don’t Ignore Community Property Law
If you live in one of the states where community property law is in force, being respectful to the law is important. If you make a third person the beneficiary to your policy, there will be troubles in the end.
Don’t Fall in the Gift Trap
When the life insurance policy is tri-partite, law considers the third party to be a recipient of gift. As such, the taxes are levied on the benefit. To avoid the situation, you need to make sure that the policyholder, the insured and the beneficiary are not three different persons. Life insurance policies should be bi-partite.
Don’t Make Govt. Beneficiary a Nominee
If you have a special needs child or an old parent who receives government benefits, it is wise not to make them your life insurance beneficiary. The reason is the government benefits will be void if they receive the insurance benefit.
Do Not Leave Out a Nominee
If you are a lifetime single, you will probably sign up for a policy that will cover only the funeral costs. As a confirmed bachelor, you will probably not want to involve anyone in your life insurance coverage. Just think who will take charge of your funerals when you die. So, choose one primary and one secondary nominee so that they may serve you finally.
Don’t Ignore the Share Issue
If you choose multiple heirs as beneficiaries to your policy, you need to decide how the money should go to the heirs. You can choose either of the two methods of distributing the proceeds. If you opt for the per capita method, the benefit will equally be divided among your heirs. On the other hand, if you choose the per stripes or the branch method, the immediate family branch will get 50% of the proceeds. The rest of the money (50%) will go divided among the next-to-immediate family members, each receiving equal shares.
Don’t Just Name Anyone
While legally speaking, you can make anyone your life insurance beneficiary, it is important that you choose the right persons. If the beneficiary is the only person you care about, you need not think much over the issue. But if there are other people, like kids or old parents, who will need the benefit, choosing the beneficiary should be a discreet job.
A little caution is really worth the care you have for others.