Do I Have to Choose a Beneficiary? What You Need to Know
When you purchase a life insurance policy, you must name a beneficiary, or several. The listed beneficiary is the person who will receive the death benefits should you pass away before you time. A sudden death due to an accident or illness leaves the family bereft, but the life insurance benefit allows them to move forward without suffering serious financial problems. The benefits are not taxed and paid rapidly, without the waiting period required for an estate to go through probate.
Choosing a Beneficiary for your Life Insurance
People have various reasons for buying life insurance. In many cases, the beneficiary is a spouse, children, parents, or other relative – but these are not the only options. If you are a business owner, you may choose to make your business the beneficiary. If you have a charitable organization that you support, you may choose to name that charity as the beneficiary. You may choose to name a trustee of an established trust, or your estate. You have many options, and selecting your beneficiary is one of the most important issues when you buy a life insurance policy.
Changing a Beneficiary
Life events may lead to the need to change a beneficiary. The birth of a child, a marriage, divorce, or starting a new business could make it necessary to change the named beneficiaries on your policy or policies. To change the named beneficiary (ies), you need to request a Change of Beneficiary form from your insurance company. You, as the owner of the policy, are the only person that has the right to change beneficiaries in most cases.
A person who has granted power of attorney to another individual, it gives that person the right to make financial decisions on your behalf. If the beneficiary of your policy is named as an “irrevocable beneficiary,” the policy is set in stone, and cannot be changed. In community property states, you may need your spouse’s permission to change beneficiaries on your policy.
Naming More Than One Beneficiary
You may choose to name several individuals or other entities as beneficiaries of the death benefit of your policy. It is imperative that you list the percentage of the benefit you want to go to each party, and how that percentage will be split should one named beneficiary pass away.
Primary or Contingent Beneficiaries
Your primary beneficiary will receive the death benefit, but should that person die, you should name a contingent beneficiary. The beneficiaries cannot be changed once the policy owner dies. In some rare cases, the policy owner dies while in the process of changing beneficiaries. In this case, the insurance company makes the final decision on the recipient of the payout of the benefits.
Life Insurance Trusts
Many people choose to establish a life insurance trust. The life insurance policy is the asset of the trust. After the life insurance policy is transferred to the insurance trust, the individual no longer owns the policy. At death, the payout goes to the trust, which allows for some control over how the funds are used. These trusts are often a strategy used by people with concerns regarding estate tax. After an irrevocable life insurance trust is established, it cannot be changed.
Need Help? Talk to Us.
Protecting the financial health of your loved ones with life insurance is an important step for people of any age. Our local agents can help you find the best policy for your situation or review your current policies and identify the current options on the market that could offer higher payouts with lower monthly premiums, and help you with any questions regarding beneficiaries, insurance trusts, and any other concerns.
September is Life Insurance Awareness Month.
It’s the perfect time to remind ourselves to plan ahead for the ones we love.