If you’ve gone through the effort of getting life insurance, you want to be sure that your family will be taken care of when you pass away.
However, did you know that if you don’t fill out the beneficiary forms correctly, then your family may have to jump through hoops to receive the payout? Or the money may not be divided as you intended? For this reason, your choice of beneficiary is one of the most critical parts of your life insurance policy.
Let’s explore this in more detail.
What Is A Life Insurance Beneficiary?
When you pass away, here’s how life insurance works. The insurer will pay out your death benefit to the person you have nominated. This person is known as the beneficiary.
Can I Have Multiple Beneficiaries?
Yes. You can have multiple beneficiaries, but you need to specify how the money will be divided between them. For example, you may want your spouse to get 50% of the benefit and your two children to get 25% each.
Who Can Be A Life Insurance Beneficiary?
Beneficiaries can be people or organizations:
Most people list family members as their beneficiaries, such as a spouse or children. You could also list members of your extended family, like your parents and siblings. If you have financial dependents that aren’t related to you, they can also be beneficiaries. For example, if you and a friend invest in a holiday home and are paying off the mortgage together, you may want to leave them some money from your death benefit to cover your part of the mortgage debt.
You can name entities as your beneficiaries, such as charitable institutions, personal businesses, or your estate. People who want their insurance benefit to be managed in a specific way can set up a trust with specific instructions detailing how the money is to be spent. They can then list the trust as the beneficiary.
Primary Vs. Contingent Beneficiary
You can think of your primary beneficiary as your first choice and the contingent beneficiary as a back-up option.
For example, you can list your spouse as your primary beneficiary and your parents as your contingent beneficiaries. If you pass away, your spouse will receive the death benefit, and your parents will receive nothing. However, if you and your spouse both happen to die at the same time in a car crash, then the money will go to your parents.
Can My Children Be Beneficiaries?
Underaged children can’t receive death benefit payouts. If you list a minor as your beneficiary, you should also nominate a custodian. The custodian manages the insurance money for your child until they reach adulthood. If there is no custodian listed, the state will appoint one, but it can be a messy, time-consuming process.
It’s also important to note that a custodian is not the same thing as a guardian. A guardian is responsible for taking care of your child. The custodian, on the other hand, manages the purse strings. They ensure the guardian receives enough money from the death benefit to cover the child’s expenses. To make things easier, you may want to nominate your child’s guardian as the custodian.
For a life insurance policy to provide for your family after you’re gone, you have to list your beneficiaries correctly, particularly if they are children. You may also want to consult your insurer or legal expert to ensure your wishes will be carried out as you intend. Most importantly, be sure to keep your beneficiary information up to date to make things as easy as possible for your loved ones.