In a perfect world, picking a life insurance beneficiary would be a fairly simple, uncomplicated process, and it is, in many cases. However, there are a number of potential financial, legal, and fiscal problems that can occur if you make a mistake while choosing your beneficiaries. It’s thus important to find out how you can avoid making one of these costly mistakes.
Here are a few beneficiary basics you need to keep in mind before going forward with the choice of a beneficiary.
Primary Beneficiary versus Contingent Beneficiary
The first thing you should know is that there are 2 main types of life insurance beneficiaries.
As its name indicates, the primary beneficiary of a life insurance is the person who’s supposed to receive the life insurance payout when the policyholder dies. Obviously, the primary beneficiary won’t be able to receive the proceeds of the life insurance policy if he or she dies before the policyholder, which brings us to the next type of beneficiary.
Secondary or contingent beneficiaries are also aptly named since they’re simply here to make sure that the policy payout doesn’t get flushed down the drain should the primary beneficiary bite the dust before the policyholder. In other words, if the primary beneficiary is still alive when the insured person dies, the contingent beneficiary gets nothing. If the primary beneficiary isn’t alive at the time of the policyholder’s death, the secondary beneficiary will get the payout.
Revocable Beneficiary versus Irrevocable Beneficiary
On top of the 2 main types of life insurance beneficiaries we’ve discussed above, there are also 2 categories said beneficiaries can fall into.
Beneficiaries should do their best to get and stay in the good graces of the insurance policyholder in their life if they’re revocable beneficiaries. Prospective beneficiaries who fall into this category can’t find themselves kicked out of the beneficiary list without notice should the policyholder decide so.
Irrevocable beneficiaries, on the other hand, don’t have much to worry about except surviving the life insurance policyholder. Primary, irrevocable beneficiaries are almost guaranteed to receive the proceeds of the policy.
How to Choose a Life Insurance Beneficiary
Before making this important decision, here are a few things you should consider.
Look into your family
It goes without saying that people in your immediate family and / or who depend on you financially should be at the top of your list of beneficiaries. Primary and contingent life insurance beneficiaries in your family can include your partner / spouse, your children, your siblings, your parents or other members of your extended family.
Consider the issue of a legal guardian
If your chosen beneficiaries are underage and are likely to still be minors at the time of your death, your life insurance company might ask you to designate an official legal guardian. Failure to do so would lead to serious legal and financial issues down the line should the aforementioned scenario happen. You should pay attention to these considerations now instead of trusting the courts to make the good choice following your death.
Pick your estate as your beneficiary
You read that well, it’s possible to designate your estate as your life insurance beneficiary, which is an option often chosen by high net worth individuals with complex estate planz. If you choose to do so, the life insurance payout will go to the administrator or the executor of your estate, which is the individual or entity designated in the policyholder’s last will to oversee the management of his or her affairs. Considering the relative complexity underlying this choice and its fiscal implications, you should sit down with an estate planner / financial advisor / accountant before going forward.
Set up a trust
If you have significant assets that you don’t want to see wasted by irresponsible and / or unreliable beneficiaries, you might want to set up a trust and designate a trustee to manage your wealth and execute your posthume will.
Give to charity
If you don’t have anybody close to you (or worthy of your money…), you always have the option to make a last good deed before leaving this earth by designating your favorite charity as a beneficiary of your life insurance policy.
Choosing an ideal — or at least appropriate — life insurance beneficiary is an important step towards your peace of mind, especially when your journey is slowly but surely coming to an end. Choose wisely using the information presented in this article.