How hard could it be designating a beneficiary to your life insurance policy? Not too hard, but it is important to give this careful thought to make sure your beneficiaries receive their death benefits quickly after you die.
You may be surprised to know the number of life insurance policies that lie unclaimed because a beneficiary could not be located! According to the
New York Times (February 25, 2011), millions of dollars lie with the State because of policies that have not yet been claimed. And while the State and the life insurance industry prosper through unclaimed policies, heirs to your insurance policy sadly will never receive the benefits even though you had been diligent in paying premiums. Thats why it is important to make sure youve done all you could do to make sure your beneficiary receives death benefits in a timely manner.
Weve provided a list of common questions pertaining to beneficiaries to help you in the process of designating your beneficiaries on a life insurance policy.
What is a beneficiary?
A beneficiary is the recipient of the proceeds of your life insurance policy. Life insurance companies ask you to list primary and secondary beneficiaries. The primary beneficiary is usually a spouse and children listed as secondary beneficiaries. When a policyholder dies, life insurance companies will issue death benefits to the primary beneficiary. If the primary beneficiary is dead, the proceeds will be passed on to the secondary (contingent) beneficiaries.
Non-traditional beneficiaries can include a non-profit organization such as your local church or an international welfare program.
Its important to let your beneficiary know the details of your life insurance policy so that he/she can do the needful when the time arrives.
Can I name more than one beneficiary?
Yes, you can have multiple primary beneficiaries as well as multiple secondary beneficiaries. You can assign a percentage against each recipient signifying the portion of death benefits each is to receive.
It is important how you word your beneficiaries. If you say children this may include children you have had from a previous marriage as well as children through your present marriage. On the other hand, if you name each child, youll have to make sure you keep upgrading your policy as more children are added to your family.
If you are divorced and have re-married, with children from your first marriage living with your ex-spouse, some states require that you keep a life insurance policy with your ex-spouse as your beneficiary. In this case, the life insurance policy is meant to compensate for loss of alimony should you die unexpectedly.
What are revocable and irrevocable beneficiaries?
When you designate a beneficiary on your policy, you would need to specify if it is revocable or irrevocable. Irrevocable beneficiaries generally cannot be changed, except by written consent from the original beneficiary.
Revocable beneficiaries can be changed. However, youll still need to go through a formal procedure requiring you to fill out a beneficiary form deleting the old beneficiary and designating the new one.
Can I name a minor as my beneficiary?
Life insurance companies will not pay out claims to anyone who is still a minor. If the beneficiary is a minor, the proceeds will be legislated through a court of law. In such a case, benefits would not be available to your children until they reach legal age. To avoid this, you can create a Trust or appoint a custodian or guardian. The beneficiary of your policy would be your Trust/custodian/guardian. The executor of your Trust would make sure that your children receive death benefits in accordance with the instructions laid down in your Trust Deed.
Designating a guardian or custodian as your beneficiary without creating a Trust would mean that the guardian would receive all the death benefits. Its important to choose your guardian carefully. He/she should be someone you can fully rely on to manage the proceeds of your policy judiciously on behalf of your children.
Will my beneficiary have to pay taxes on death benefits?
The proceeds of a life insurance policy are generally exempt from tax. But if your beneficiary is the executor of your estate, the money will be considered as part of your estate and may be subject to estate taxing.
If your primary beneficiary is dead and there is no contingent or secondary beneficiary, the proceeds will automatically go to your estate and will be liable to taxation. Life insurance proceeds will go through a lengthy probate process and what is left of the estate will be distributed among your heirs.
Can I list the beneficiary of my life insurance policy in my Will?
Life insurance companies are very strict about issuing benefits
only to the named beneficiaries listed on a life insurance policy. The named beneficiary on your life insurance policy will take precedence over your Will. This means that as far as life insurance goes, your Will is not the last word on who gets the proceeds of your policy. If you want to change the beneficiary on your life insurance policy, dont do it in your Will. Make sure the change of beneficiary is effected on the life insurance policy itself.
Why is it important to update my beneficiarys address?
Life insurance companies generally will make no effort to search out and locate the beneficiary of a life insurance policy in order to pay out death benefits. They expect beneficiaries to come forward and make a claim. In the light of this, its important to update your beneficiaries address/es on your life insurance policies. If your children have moved make sure the address on the policy reflects their current address.
To summarize
Its a good idea to conduct a routine review of your policy every year to make sure the information is current. You might want to take this opportunity to make sure your coverage reflects your current life insurance needs. Life insurance needs usually diminish over time and you dont want to be stuck paying expensive premiums for a high coverage amount you no longer need.
If you dont have a policy, take the time to seriously consider financially protecting your family through
term insurance. This could make a world of a difference to your family especially when you consider the kind of economic times we live in. Rates are cheaper now and its easy to get one through online life insurance quoting services that provide
instant term life quotes from top-rated carriers. Compare policies and choose one that best applies to your situation.
