Choosing Your Life Insurance Beneficiary - The Important Tips
It may seem like choosing a beneficiary is a simple task. However, there are several things to consider before making a choice.
The process of taking out Life Insurance requires you to make several choices. Among these are deciding on the policy length and the amount of coverage needed.
But choosing your beneficiary may be the most important decision of all.
It seems like such a simple task at first. But making the choice without considering all of the potential issues could lead to problems later on.
In this article, we take a look at what a beneficiary is in relation to a Life Insurance policy. We also share some tips for making the right choice for you and your family.
What Is a Beneficiary?
In the simplest terms, a beneficiary is somebody who receives money from your policy once a claim is made. You name them as part of the application process.
Many assume that they can only name one beneficiary to their Life Insurance policy. But that isn’t the case.
Who Can Become a Beneficiary?
Interestingly, your beneficiary doesn’t necessarily have to be a person. In fact, you can name any of the following:
- Your spouse
- Your children
- Adopted or step-children
- A friend
- A business partner
- A trust
- A charity
- Your estate
When naming an individual, it’s important to understand the regulations surrounding age. Typically, you will nominate somebody who’s aged 18 or over. This ensures that the beneficiary receives the benefit as quickly as possible.
This doesn’t mean that you can’t name somebody who’s under 18 as your beneficiary. However, this person can’t claim the benefit directly until they’re of age. Should you pass before the beneficiary turns 18, the money will go to a legal guardian or trustee. And if you haven’t appointed one for your beneficiary, the courts may do it on your behalf. This often comes at a cost, which can eat into the lump sum that your policy grants.
All of this brings us to a key question…
How do you choose a beneficiary?
Follow these tips to ensure you’ll make the right choice.
Tip #1 – Avoid Nominating Minor Children When Possible
As mentioned above, choosing somebody who’s below the age of 18 creates the possibility for complications. Of course, many policyholders want to provide for their children’s future with their policy. And that’s understandable.
But this creates a catch-22 situation.
You want to nominate your child, but you’re wary of the issues.
The solution is to not name a child directly. Instead, do one of the following:
- Create a trust for the money that you can nominate.
- Assign a custodian or legal guardian for your child. Do not let the courts handle this on your behalf as it will cost a lot of money. Furthermore, you must trust the person that you choose implicitly. They will have some measure of control over how the money gets used after your passing.
Tip #2 – Remind Yourself of the Policy’s Purpose
Why did you get Life Insurance in the first place?
Perhaps you want to use it to replace lost income for your family if you pass away. In that case, it’s best to name your spouse or partner as your primary beneficiary.
Do you want to ensure your children have all of the money they need for their education?
A trust may be the better option in this scenario.
Maybe you have a business that can provide an income for your family. You just need to ensure the business keeps operating when you’re gone.
In this scenario, it may be best to name a business partner as your beneficiary.
The point is that you should take some time to really think about how you want your loved ones to use the benefit. Figure that out and then make your choices, depending on who will best serve that purpose.
Tip #3 – Update Your Policy If Your Circumstances Change
The passing of a primary beneficiary isn’t the only occasion that calls for a revisit of your policy. Any change to your circumstances may cause you to make changes.
For example, let’s say that you get married a few years after taking out your policy. You hadn’t met your partner before getting the policy, which means they’re not named on it. You’ll likely want to make said partner your new primary beneficiary.
Fortunately, changing your beneficiaries is a fairly simple process. It typically involves contacting your provider and requesting a form. Fill it out, send it back, and your policy gets amended.
Tip #4 – Consider the Potential Beneficiary’s Own Circumstances
Interestingly, the potential beneficiary’s circumstances may play a part in your decision.
For example, let’s say you intend to name somebody who has a disability. They’re claiming benefits related to that disability due to their lowered income level. If this person receives your Life Insurance benefit, the money may take them above the income threshold for their benefits. This could mean they lose long-term income for a short-term lump sum.
This doesn’t necessarily mean that you can’t name somebody in such a situation as a beneficiary. However, you need to put a lot of thought into their future. If the policy’s lump sum is lower than the amount they’ll receive from their benefits, you may decide to choose somebody else.
The point here is to consider how the lump sum will affect the recipient. As strange as it may be, not everybody will benefit from a single large payment.
Make Your Choice
As you can see, choosing a beneficiary is a more involved process than many realise. And you may soon realise that the person you thought of choosing may not be as suitable as you believed.
Consider these tips when making your choice.
There’s no need to rush into any decisions here. And remember, you can change your beneficiaries at any time. That means you can correct any mistakes you made when creating your policy.
But what if you don’t have Life Insurance yet?
If that’s the case, there’s only one question to ask:
To insure or not to insure?
That is a question that only you can answer, perhaps with the help of some professional advice. This is general information only and does not take into consideration your individual circumstances, objectives, financial situation, or needs.