9 Things to Consider When Choosing a Beneficiary

9 Things to Consider When Choosing a Beneficiary

9 Things to Consider When Choosing a Beneficiary

It is important that the payout of a life insurance policy is received hassle-free by the person intended to receive it. The consequences of missing out on important details can be grave. 

Before you pen down a beneficiary’s name in your application for life insurance, use this as a checklist of things to consider. 

1. Know the Purpose of the Policy 

What is the reason for purchasing life insurance? If you want to ensure your family’s financial needs are taken care of in your absence, your spouse and children might be the best option. If you want your company to continue, it might be your business partner or the company itself. 

2. Ask, ‘Who Needs the Benefit the Most?’  

If you are buying a policy to provide a safety net for your loved ones, you may be confused as to which of your family members to name as a beneficiary, especially if you are the sole breadwinner for a large family.  

If you have older parents, a spouse, and children that depend on you, consider using the Per Stirpes approach on naming beneficiaries. With this approach, your life insurance payout will be divided by generation, so that members of each generation get an equal portion. 

And if you’re a single parent, think about who you’d want to take charge of your children if you die. Your payout would support both the guardian’s and your children’s needs, pay off any lingering debts, and even leave them with savings for future expenses. 

3. Inform Your Beneficiaries 

It is important to let your potential beneficiary know about the policy ahead of time, so they know what to expect and who to contact. If you name a beneficiary but they aren’t given the correct information or can’t be found after you die, your provider may turn the payout over to the state’s unclaimed property program. 

4. Naming Minors as Beneficiaries 

If you name a minor (someone below the age of 18) as a beneficiary, you must make sure that you mention in your will, who will take custody of the child should you die. Doing this ensures that the court approval process of the new guardianship is efficient and the money can then be transferred into a trust named after the minor.  

Once they pass the age of 18, the payout process can then be structured in two ways. They could either withdraw the funds as and when needed or the trust would disburse fixed amounts of money to the beneficiary quarterly or annually. You get to choose what would occur. 

5. Ability to Manage Money 

It’s highly possible that a spouse or family member may not know how to manage the money after you’re gone. In these scenarios, all of your efforts into financing your policy premiums may go to waste if the payout money isn’t used in an appropriate manner.  

We recently went through a situation like this with one of our clients, read more here. You may want to consider working with a trusted advisor who will support your family through the claims settlement process and guide them on how to best employ the money. 

Another option would be to establish a trust and name a trustee to invest and disburse funds on his or her behalf.  

6. Plan B  

Name a secondary beneficiary so that if your first beneficiary dies with you or before you, the life insurance payout passes directly to the secondary beneficiary. 

7. Review Your Beneficiary Choices Periodically 

If you’ve had major life events like the following: 

  • You get married or divorced 
  • You have kids 
  • You become responsible for other dependents, like aging parents or relatives 
  • Your kids become financially independent 
  • A family member or dependent dies 

You want to make sure your beneficiary choices are up to date. If you fail to do so, the payout will still go to the original beneficiary.  

8. Aligning Your Will to Your Life Insurance Policy 

Don’t count on your will to override your beneficiary choices. You want to make sure that the beneficiaries listed in your will match those of the life insurance policy. In the case that these don’t match, your life insurance beneficiary designations will win out every time. Remember, life insurance is a contract and will be enforced as it is written. 

9. What Happens If You Don’t Designate a Beneficiary? 

If you don’t explicitly list all of your assets as a beneficiary, the insurance proceeds will be used to pay your estate. This process can take a while, and it could be handled by the probate court. 

I hope this helps to clear some of the confusion around the right way to choosing a beneficiary. Remember, when you’re no longer around the only thing that matters is what is listed on the policy contract- so make sure it counts. 

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