10 Tips For Choosing A Life Insurance Beneficiary

By Author: nrilife
Total Articles: 17
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Although it seems like one of those ‘mandatory fields’ that tempts you to jot the first name that comes to mind, pondering and specifying the beneficiary for the proceeds of your insurance payout is a crucial decision.

Let’s look at a few tips and factors to consider before choosing a beneficiary and how to avoid common mistakes:

1. Keep the objective of the policy in mind.
The objective of why you are purchasing life insurance should be the main factor influencing your choice. Do you wish to financially provide for your family after your demise? If the answer is yes, then naming your spouse as a nominee might be the best decision. If the policy is taken to ensure a business or company’s future, the nominee might be a business partner.

2. Know your options.
When deciding a beneficiary, there are a few more aspects to consider than spouse or kids. Essentially, you can designate any or more of the examples listed below as beneficiary:

One person
Two or more people (and you choose how the benefit is divided among them)
The trustee of a trust you’ve established
...
... A non-profit or charity
Your estate

3. Have a back-up.
On your chosen policy, the primary beneficiary is the person(s) or entity chosen by you to receive the insurance payout upon your demise. However, if this primary beneficiary cannot be contacted, refuses the payout or is deceased at the time of your death, then a secondary (or contingent) beneficiary becomes the recipient. The best way to go about this is to follow the same advice for choosing an alternate beneficiary as you would for selecting the primary one.

4. Keep it up-to-date.
One of the steps that are often overlooked when it comes to a life insurance policy is not keeping the beneficiaries up-to-date. For instance, let’s say you are single and nominate your mother as a primary beneficiary but a few years later you get married. If you haven’t changed the beneficiary on your life insurance policy, then the payout would still go to your mother rather than your spouse or children.

5. Be specific.
Keeping beneficiaries updated is one thing but also remember to be specific when you name them. For instance; if you have named ‘my children’ as beneficiaries and one of them passes away before you do, would you want the other child(ren) to receive the entire amount or should the deceased child’s heirs receive their parent’s share?

6. Avoid designating a minor.
State regulations may have a role to play in this as they decide how much a minor can receive from life insurance payouts. As a result, the court may appoint a guardian to administer the funds. This tends to be quite a time-consuming process and usually takes multiple court dates. To navigate this, consider either setting up a trust or designating an adult you trust to oversee the distribution of the funds to the minor.

7. Don’t disqualify your beneficiary from other benefits unwittingly.
A person that is aged, blind or disabled and receives Supplemental Security Income (SSI) and/or Medicaid may have their monetary benefits reduced or even suspended if the inheritance increases their income according to program eligibility. Always consider federal regulations before choosing a beneficiary.

8. Don’t rely on your will to override your beneficiary choices.
Ensure that your wishes are adhered to by matching your will with your life insurance policy. If you update your will, also consider updating your life insurance beneficiaries (and vice versa). In the case of your will and life insurance beneficiaries not matching, your life insurance beneficiaries will be considered the primary nominee. Bear in mind, life insurance is a contract and will play out exactly as it is written.

9. Be aware of state laws.
Generally, in community property states, your partner/spouse would be required to sign a waiver if you nominate someone else as a beneficiary. Research and verify with your insurance agent for details regarding this and any other queries you may have surrounding designating your life insurance beneficiaries in your state.

10. What happens if you don’t choose a beneficiary?
If you do not designate any beneficiary (or if all of the pass away before you), the life insurance proceeds would then go to your estate. In such an event, the probate court will decide how to manage the funds. This can be time-consuming and possibly requires a portion of the proceeds. As a result, to ensure that the funds you have stored reach the people for who it was intended, it is crucial to designate a beneficiary.