Choosing a Beneficiary

One of the most crucial steps in life insurance planning is choosing your beneficiary, which is the person (or entity) that will receive the cash benefits upon your death.  These guidelines may help ensure that you are leaving the benefits to those you intended.

Choosing a Beneficiary

Who or what can be a beneficiary?

  • Persons – generally you can name anyone with whom you have a relationship such as family members, friends, or loved ones
  • A trust
  • A charity
  • Your estate

How many beneficiaries should typically be named?
Beneficiaries are typically categorized as primary and secondary (or contingent) beneficiaries.

The primary beneficiary is entitled to the proceeds of the policy upon the death of the insured. A secondary (or contingent) beneficiary is entitled to the policy proceeds if the primary beneficiary has predeceased the insured. In some cases, a final beneficiary is named in the event both the primary and secondary beneficiaries have passed prior to the insured.

What are some of the more common mistakes when naming a beneficiary?

  1. Naming a minor child. Most life insurance companies will not pay proceeds directly to minors. If you have not created a trust, you may want to designate a custodian under the Uniform Transfers to Minors Act (UTMA) to act on behalf of the minor.
  2. Overlooking your spouse in a community property state. If you live in a community property state your spouse may be entitled to a portion of any life insurance proceeds due to its marital property laws. If your desire is to leave proceeds to someone other than your spouse, then the spouse may need to sign a marital property waiver, and include it with the beneficiary form.
  3. Making a dependent ineligible for government benefits. Naming a dependent, such as a child with special needs, puts that dependent at risk of losing governmental assistance, if they are receiving some. Anyone receiving a gift or inheritance of more than $2,000 may be disqualified from Social Security Income and Medicaid.
  4. Assuming your last will and testament trumps the policy. A life insurance policy is a contract. And regardless of what your will says, the insurance company must pay the beneficiary listed on the policy. This is easily fixed by updating your policy to pay according to your will.
  5. Forgetting to update. Remember to update your beneficiaries after major life events, such as marriage, having children, or divorce. Change your beneficiaries when your circumstances change!
  6. Naming only a primary beneficiary (or none at all). When there is no living beneficiary, or none named, the life insurance benefit typically goes into the estate and becomes subject to probate. This leads to heirs facing a long wait to get the money, and the proceeds would then be available to pay off creditors.
  7. Staying mum. Tell someone that you have life insurance, where it is, and how to find it! In the United States alone there is over $1 billion dollars in unclaimed life insurance benefits.

Beneficiaries are named in retirement accounts and in life insurance. Take the time to review your retirement plan and your life insurance policy to make sure your beneficiary information is designated appropriately and serves the purpose you intended.