Although it may seem like a quick selection or one that’s easy to glaze over, choosing who will receive the proceeds of your life insurance policy is an important decision. There are several things to consider to make the best choice for your beneficiary.
Learn some tips to help you avoid some common missteps and choose a beneficiary that’s best for you.
1. Keep the purpose of the life insurance policy in mind
The reasons why you’re buying life insurance should drive your choice. Do you want to provide financially for your family after you’re gone? If so, your spouse might be the best choice. If you want your company to continue, it might be your business partner. Choose a policy and life insurance beneficiary that help you continue your goals.
2. Know your options
When choosing a life insurance beneficiary, there are more options than your spouse or kids. Generally, if you own the policy on yourself, you can designate any one or more of the following as a beneficiary:
- One person – when paid directly to a person(s), death benefits are generally tax-free
- Two or more people (and you decide how the benefit is split among them)
- A trust you’ve established
- A non-profit or charity
- Your estate (this is generally not recommended since it can trigger tax consequences, cause delays, and may result in proceeds not being paid out as you intended – see #10 below)
You can also decide if the life insurance proceeds will be paid out in one lump sum or a series of payments.
3. Have a back-up
On your policy, the primary beneficiary is the person(s) or entity you select to receive the life insurance proceeds upon your death. However, if your primary beneficiary can’t be located, refuses the proceeds, or is deceased at the time of your death, then a secondary (or contingent) beneficiary becomes the recipient. Primary and contingent beneficiaries can be equally important, so make sure you follow the same advice for selecting a secondary beneficiary as you would for choosing the primary one.
4. Keep your life insurance policy up-to-date
One of the most common oversights with a life insurance policy is not keeping the beneficiaries up-to-date. Say you’re single and name your mother as the primary beneficiary, but later on you get married. If you didn’t update the beneficiary on your policy, then the proceeds will still go to your mother. You can avoid having an outdated life insurance beneficiary by reviewing your policy annually. Talk to your agent with any questions you may have.
5. Be specific
In addition to keeping your beneficiaries current, remember to be specific when you name them. If you name “my children” as beneficiaries and one of them dies before you, do you want the other child(ren) to get the entire benefit or the deceased child’s heirs to get their parent’s share?
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6. Avoid designating a minor
State regulations may limit if or how much a minor child can receive from life insurance proceeds, so the court may have to appoint a guardian to administer the funds. That can be a lengthy process, and one that typically requires multiple court dates. To avoid this, consider setting up a trust or designating an adult you trust to oversee the distribution of the money to the minor.
7. Don’t unintentionally disqualify your beneficiary from other benefits
According to the Social Security Administration, a person who is aged, blind or disabled and receives Supplemental Security Income (SSI) and/or Medicaid could potentially have their monetary benefits reduced or suspended if their inheritance increases their income, based on program eligibility. If one of your beneficiaries needs to use these benefits to help their financial situation after your death, take federal regulations into consideration before adding them as a beneficiary.
8. Don’t count on your will to override your beneficiary choices
Make sure your wishes are honored by having your will match your life insurance policy. If you update your will, take the time to update your life insurance beneficiaries (and vice versa). In the event your will and life insurance beneficiaries do not match, your life insurance beneficiary designations will win out every time. Remember, life insurance is a contract and will be enforced as it is written.
9. Be aware of state laws
Typically, in community property states, your spouse will have to sign a waiver if you designate someone else to be the beneficiary. Check with your independent agent for more details or to ask questions surrounding designating your life insurance beneficiaries in your state.
10. What happens if you don’t designate a beneficiary?
If you do not designate any beneficiaries (or all of them predecease you), the life insurance proceeds will be paid to your estate. If that happens, the probate court will decide how to handle the funds. This could take a while and possibly chip away at the proceeds. So, in order to get the money into the hands of those who need it as soon as possible, designating a specific beneficiary is the way to go.
Talk to your independent agent today
If you’re ready to shop for life insurance, you may need help deciding what kind of life insurance is best for your needs. Talk to your independent agent today for help finding a life insurance policy that fits your needs and budget.
Coverages described herein may not be available in all states. Please contact one of our local independent agents for complete details on coverages and discounts. If the policy coverage descriptions herein conflict with the language in the policy, the language in the policy applies. The material provided above is for informational, educational and/or suggestion purposes only, and does not imply coverage. WE RESERVE THE RIGHT TO REFUSE TO QUOTE ANY INDIVIDUAL PREMIUM RATE FOR THE INSURANCE HEREIN ADVERTISED. Applicable policies may be underwritten by Grange Insurance Company, Trustgard Insurance Company, Grange Indemnity Insurance Company, Grange Insurance Company of Michigan* and Grange Property & Casualty Insurance Company*, Integrity Insurance Company*, Integrity Property & Casualty Insurance Company*, Integrity Select Insurance Company*. *Not licensed in Pennsylvania
This article is not intended to be used, nor can it be used, by any taxpayer for the purpose of avoiding U.S. federal, state or local tax penalties. It is written to support the promotion of the matter addressed here. Kansas City Life Insurance Company does not provide tax, accounting or legal advice. Any taxpayer should seek advice based on his/her particular circumstances from an independent tax advisor.
All life policies are underwritten by Grange Life Insurance Company, Columbus OH, or Kansas City Life, Kansas City, MO, and are subject to underwriting approval. Not available in all states.
Insurance Information Institute (III)
Social Security Administration