In order to compensate this loss, the policyholder must name a beneficiary to his life insurance policy. The beneficiary would receive the proceeds of the policy.
A life insurance beneficiary can be an individual, an estate, a trust or an organization. Ideally, you should specifically name the beneficiary. There are no limits to the number of beneficiaries you can have, but in the case of multiple beneficiaries it is advisable to assign the percentage of benefits each beneficiary is to receive.
Primary and Secondary Beneficiaries
Most life insurance companies will require you to designate primary and secondary beneficiaries. The primary beneficiary has first entitlement to the death benefits if you die. But if the primary beneficiary has deceased then the proceeds will go to the secondary or contingent beneficiary. Some
life insurance companies may also require you to designate a third beneficiary in the likelihood that the primary and secondary beneficiaries are deceased.
Who can be a beneficiary?
You can designate anyone as your beneficiary. Most people designate their spouses and name their children as the second beneficiaries. Some states require your beneficiary to be a relative if you are bequeathing your proceeds to an individual. In the case of an estate or trust, you should consult a financial advisor as these may be liable to taxes. Designating your estate as your beneficiary will also mean that your creditors can seize the funds to cover your debts and your beneficiaries will get the proceeds only after a process called probate takes place.
What if your beneficiary is a minor?
You can name a minor as your beneficiary only if you appoint a guardian to supervise and manage the proceeds of your policy until such time that the minor reaches legal age. If you do not have a guardian, then you would need to create a trust that can receive and disburse the proceeds of your policy in accordance with the trust deed on behalf of your children until they reach legal age. In such a situation the trust will be designated as your beneficiary. There must be a legal trust established and in existence before you die. If there is no trust, the court will hold the proceeds of your life insurance policy until your child/ren reaches legal age.
Naming Your Spouse as Your Beneficiary
Most policyholders designate their spouses as their beneficiary. If you get a divorce, have re-married or your spouse becomes unable to handle financial matters, it is important to change your beneficiary to suit the changing circumstances.
Under state laws in community property states like Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington or Wisconsin your spouse is entitled to a portion of the proceeds from your life insurance policy. If you have named anyone other than your spouse as your beneficiary, your spouse can make a claim on your death benefits. In such cases, getting a written statement from her waiving her rights to any of the proceeds from your policy may resolve the issue. Get legal advice to see how you can best protect your beneficiarys interests.
The consequence of bequeathing your life insurance policy in your Will
If you have bequeathed the proceeds of your life insurance policy to a beneficiary named in your Will, and there is another name designated as the beneficiary on your life insurance policy, then the beneficiary named on your life insurance policy takes precedence. Its important to keep updating your beneficiaries on your
life insurance policies.
Revocable and Irrevocable Beneficiaries
If the beneficiary is revocable its important to update the beneficiaries of your policy with every life-changing event such as a marriage, the birth of a child, divorce or the death of a beneficiary. Changing the beneficiary on your life insurance policy is a simple process, requiring you to fill out a form. Revocable beneficiaries can be changed at any time, but irrevocable beneficiaries cannot be changed without the consent of the original beneficiary. An irrevocable beneficiary must sign a consent form to remove his/her name as the beneficiary. If he/she refuses, then the only option you have is to cancel the policy.
Conclusion
Take time to carefully consider who you name as your primary and secondary beneficiaries. You wont be alive to rectify any mistakes, so update your beneficiaries on your life insurance policies as a matter of priority to avoid your loved ones being disappointed and not having access to money that was intended for them.
