Although it may appear to be a simple or minor decision, deciding who will get the proceeds of your life insurance policy is important. There are various factors to consider in order to make the greatest decision for your beneficiary.
To help you along the way, this blog will explain what a beneficiary is, what factors you should take into account when selecting one, and what consequences your decision may have. The wise choices you make today can serve as a guiding light for your loved ones in the years to come.
What is a Beneficiary?
Your life insurance beneficiary is the individual who receives the policy proceeds upon your death. Beneficiaries are typically a policyholder’s spouse, children, or parents, but you can choose anyone, including a church or charity.
You may choose to have multiple beneficiaries. For instance, if you are married but manage your parents’ finances, you can name your spouse, your mother, and your father as beneficiaries.
Choosing a beneficiary for your life insurance policy is a crucial aspect of policy ownership. In fact, for the majority of individuals, the beneficiary is the primary motivation for purchasing life insurance.
Difference Between a Primary and Contingent Life Insurance Beneficiary
Your primary beneficiary is the person or entity you name as the person or entity who will receive the policy’s payout upon your death. The Insurance Information Institute (III) suggests that you also name a contingent beneficiary as the person who will receive benefits if your primary beneficiary cannot be found or dies. It is critical that you identify each beneficiary with as much accuracy as possible.
Difference Between a Revocable and Irrevocable Life Insurance Beneficiary
If you own a revocable beneficiary life insurance policy, you can change the beneficiary without the approval of the present beneficiary.
A policy with an irrevocable beneficiary, on the other hand, requires the policyholder to obtain the present beneficiary’s approval before making a change. If you want to ensure that the payoff reaches someone, such as a child, naming that person as an irrevocable beneficiary can make sense.
Tips for Choosing a Beneficiary
- Remember the purpose of the life insurance policy: The reasons for purchasing life insurance should guide your decision. Do you wish to leave a financial legacy for your family after you die? If this is the case, your spouse may be the best option. It might be your business partner if you want your company to survive. Choose a policy and a life insurance beneficiary that will assist you in achieving your goals.
- Understand your options: You do not have to name an individual as the beneficiary. You can name your estate, a trust, or a charity as your beneficiary. You should designate a trust as the beneficiary of your life insurance policy when:
- When you have dependents or minor children, you want someone to handle the settlement on their behalf.
- You want to make sure the policy’s revenues are only invested for a predetermined amount of time or utilized for specific reasons (such as paying for daycare or college expenses).
- In the event of divorce, you don’t want disagreements.
- Avoid naming a minor as the beneficiary: A guardian may need to be appointed by the court to manage the proceeds of a life insurance policy since various laws may have restrictions on whether or how much a minor can receive. That can take a while, and it usually involves several court appearances. To prevent this, think about creating a trust or appointing a responsible adult to supervise the money’s transfer to the child.
- Keep your life insurance coverage up to date: One of the most typical mistakes with a life insurance policy is failing to keep the beneficiaries updated. Let’s say you’re unmarried and name your mother as the primary beneficiary, but you later marry. If you did not change the beneficiary on your policy, the proceeds will keep going to your mother. By evaluating your policy annually, you can prevent having an out-of-date life insurance beneficiary.
You should revisit your beneficiary choice once a year or if a major life event occurs. The following are examples of common life situations in which you could want to change your beneficiary or beneficiaries:
- When you get married
- When you divorce,
- When you have children (or more),
- When you take over the care of a loved one, such as an aging parent or relative
- When your children achieve financial independence
- Name a contingent beneficiary: The designation of a contingent beneficiary assists in keeping the death benefit out of probate. It also gives you authority over who receives the proceeds of your insurance policy. When you die, the life insurance company pays the first beneficiary. If the latter dies before you, the money is distributed to the contingent beneficiary. When there is no contingent beneficiary, the proceeds become part of your estate, which might make things more complicated. In the absence of a will, your estate may be subject to probate, which is the legal process of distributing the deceased’s assets. The compensation will be decided by a judge. Typically, the probate process takes many months. Furthermore, it may have an impact on the ultimate amount disbursed because your estate must pay legal fees. For these reasons, having one or more contingent beneficiaries is always a smart idea.
- Be specific: Aside from keeping your beneficiaries up to date, remember to be specific while naming them. If you specify “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 receive a portion of the benefit?
- Check that your will matches the beneficiary choices on your life insurance policy: The life insurance policy and will you possess are distinct legal contracts. Modifying the beneficiaries of your life insurance in your will differs from modifying your choice of your life insurance beneficiaries. If there is a discrepancy, the distribution of the life insurance payout will be carried out according to the beneficiary designations specified in your life insurance policy. For instance, suppose your will designates your two children as the beneficiaries of your life insurance, while your life insurance policy lists your spouse as the recipient. In this scenario, the life insurance benefit will be awarded to your spouse. For this, it is important to update both your will and life insurance policy to accurately reflect your present desires. If you modify your will, remember to also update your life insurance policy and vice versa.
How to Change a Beneficiary
Changing a life insurance beneficiary is usually a straightforward process, and most life insurance policies allow for changes to be made as and when you need them. It’s important to remember that life’s circumstances are dynamic, and your policy should reflect these changes. Here is a simple guide on how you can make the necessary adjustments:
- Review Your Policy: The first step is to review your current policy. Ensure that you have a clear understanding of the terms and conditions, particularly the sections related to beneficiaries.
- Contact Your Insurance Provider: Get in touch with your insurance provider and express your intention to change your beneficiary. They can guide you on their specific procedures and provide the necessary forms.
- Fill Out the Required Forms: You will typically be required to fill out a ‘Change of Beneficiary’ form. The form usually asks for details about the current and new beneficiary(s). Ensure that you fill out the form correctly to avoid any potential issues down the line.
- Submit the Form: Once you’ve filled out the form, submit it back to your insurance provider. Make sure to keep a copy for your records. The change isn’t official until the insurance company acknowledges it.
- Confirmation: Your insurance company will usually send a confirmation once the change has been processed. It’s important to keep this document safe, as it’s your proof that the change has been made.
Remember, it’s advisable to review your beneficiaries periodically or when significant life events occur (marriage, divorce, the birth of a child, etc.) to ensure your policy continues to meet your intentions and your loved ones’ needs. And if your current beneficiary is designated as ‘irrevocable’, you’ll need their consent to make any changes. Always consult with a financial advisor or insurance professional if you’re unsure about any aspect of changing your beneficiary.
What if You Don’t Have a Beneficiary?
When you sign up for a policy, the insurer will ask you to name a beneficiary for your life insurance. This ensures that the benefit funds reaches the chosen recipient as quickly as possible following your death.
If you do not choose a beneficiary, they are no longer alive, or the insurer is unable to trace them, the payout is divided to your estate by your local probate court. Probate processes can be time-consuming and expensive.
Your heirs will not receive the payoff right away, nor will they receive the entire amount. Additionally, since numerous people could stake a claim to the money, there is always a chance that it will not end up where you intended. For these reasons, it is always advisable to keep your beneficiary designations current.
In closing, making the crucial choice of a life insurance beneficiary is not a decision to be taken lightly. It represents the final touch in your financial planning, a gesture of care for those who will remain after you. Understanding the role of a beneficiary, the potential implications, and considerations when selecting one is vital. So take your time, consider all factors, and make the choice that best fits your circumstances and wishes. After all, life insurance is more than just a policy; it’s an assurance of support for your loved ones when they’ll need it the most.
Frequently Asked Questions (FAQs) About Choosing a Life Insurance Beneficiary
A life insurance beneficiary is an individual, group of individuals, or entity that you designate to receive the payout from your life insurance policy upon your death.
Yes, you can indeed specify multiple beneficiaries for your life insurance policy. You’ll need to decide how the benefits will be distributed among them, which can be done either equally or in specified percentages.
Absolutely. Most life insurance policies allow you to change your beneficiary at any time. However, if you’ve designated an irrevocable beneficiary, you’ll need their consent to make changes.
No, your beneficiary does not necessarily have to be a family member. You can choose a friend, a charitable organization, a trust, or even a business as your beneficiary.
If you don’t name a beneficiary, the life insurance proceeds will typically go to your estate upon your death. However, this can complicate matters as it may have to go through probate, potentially delaying the payout and potentially exposing it to creditors and estate taxes.
When selecting a beneficiary, you should consider their age, financial stability, their ability to manage a large sum of money, and your relationship with them. If your chosen beneficiary is a minor, you’ll need to make additional arrangements, like setting up a trust, because minors can’t directly inherit the proceeds.
While it’s not legally required, it is a good idea to inform your beneficiaries about the policy. This can ensure they are aware of the policy and know the necessary steps to claim the benefit when the time comes.
Find a solution for what you’re looking for
Remember that your choices today will have an impact on your loved ones’ future comfort and security as you proceed with the process of choosing a beneficiary for life insurance. Think carefully and ahead when making your decision so that it will leave a lasting impact. At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure the best solution for you and your needs. We’ve been providing expert life insurance solutions since 2007, including no medical life insurance, term life insurance, and permanent life insurance, to build the best package to give you the protection you need.
Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today. We’re proudly based out of Hamilton, and service clients anywhere in Ontario, Alberta and British Columbia; including areas such as Kitchener, Lethbridge, and, Kelowna.