How to Choose a Life Insurance Beneficiary

Your beneficiaries are the reason you are considering life insurance. You have a vision of how the proceeds may be used to help those that will be affected if you are no longer around. You may imagine the mortgage being paid off, your debts cleared, college tuition covered and enough money so that your family can maintain their lifestyle for years to come.
 

The reality is that the only control you have is when you name the beneficiary or beneficiaries. Here are some things to consider when deciding on the beneficiary:

1. Think about who needs financial protection, how much they need, and if they can handle the responsibility

The beneficiary should be someone you can trust to manage the insurance payout and who will make sure any financial burdens are addressed.

2. Organize protection for minor children

Minor children cannot receive an insurance payout. You will need to set up a trust, and appoint a trustee or a designated guardian who will manage the money until the child is 18 or 21, depending on the state. If you don’t do this, the courts will be in charge and assign a person of their choosing to manage the insurance benefit.

3. Don’t think your will is the last word

Your will covers assets that are in your estate. Life insurance is an independent contract that does not become a part of the estate. The proceeds are paid directly to the beneficiary. For example, if your oldest adult child is named sole beneficiary, he or she is under no legal obligation to share the payout with siblings, even if you requested in your will that the proceeds of your estate be shared equally among your children.

The good news is that you are able to list as many beneficiaries as you like, and assign a specific percentage of the proceeds to each one. You can control the payouts to your kids, your spouse, your favorite charity and your long lost nephew.

4. Don’t rely on the kindness of others

Be very specific when naming beneficiaries. You may name your daughter “Jane Smith” as your beneficiary, but unless you’ve also identified her by her address, social security number, specifically as your daughter, etc., another “Jane Smith” could show up and contest the payout.

If you plan to rely on trustees or third parties to handle the payout, make sure you select someone you really trust. When large sums of money are in play, temptation can set in. There are a lot of ways money can be manipulated that would not be to the advantage of the beneficiary.

5. Get it done

You should always name a primary, a secondary and a final beneficiary. For instance, if your spouse is your only beneficiary, and he or she passes away before you do, the payout would go into your estate and the probate court is now in control. Naming additional beneficiaries provides a back-up plan. 

6. Stay tuned in

Set your calendar to review your beneficiaries at least once a year. You can easily update the beneficiaries to reflect your current situation. That long lost nephew could now be a dot-com king, and may not need your help anymore.

These top-level considerations should get you thinking seriously about how you manage the beneficiary or beneficiaries of your life insurance. If you have a complicated situation, it’s advisable to contact a financial adviser or lawyer who specializes in estate planning.

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