There are a lot of things to consider when you buy life insurance. When’s the best time to buy a life insurance policy? Should you buy term life insurance or permanent life insurance? If it’s term, how long should the term be? And how large should the benefit be? Amid all of these questions, one questions that often gets overlooked is how to choose the right life insurance beneficiary designations.
Beneficiary designations are important, so you should pick yours carefully. Also, it’s not a one-and-done deal. You should review your designations periodically, especially after major life changes, to make sure that they still reflect your wishes.
Who Can Be a Beneficiary?
The life insurance beneficiary is the person, people or entity that will receive the death benefit. You can name a single person or multiple people. Other beneficiary options include the trustee of a trust that you’ve established or a charity that you would like to support.
According to the Insurance Information Institute, it’s smart to include both primary and contingent beneficiaries. It’s also smart to identify the beneficiaries as clearly as possible, with both a name and Social Security Number.
Who Shouldn’t Be a Beneficiary?
You can name your estate as a beneficiary, and while this might seem like a simple solution, it can also lead to unintended delays and tax consequences.
It’s also generally recommended that people avoid naming minors as the beneficiaries, as minors cannot typically receive the benefit directly. A common alternative is set up a trust for the minor. This way, the minor can still benefit from the policy. A trust may also be an option if you want the funds to help support an individual with special needs or someone who may not be able to manage money wisely.
When Life Insurance and Wills Clash
In some cases, a person’s will may conflict with their life insurance policy designations. For example, your will may state that your assets should go to your new spouse, but your life insurance policy may name your ex-spouse as the beneficiary.
This sort of conflict can lead to ugly disputes. State law may play a role in the outcome, and some states have revocation-on-divorce laws that automatically remove an ex-spouse as a beneficiary upon divorce. However, in many cases, the life insurance policy designation may override the will.
The best way to avoid problems – and to avoid having your life insurance funds go to the wrong person – is to update your policy designations as needed.
When to Review Your Life Insurance Designations
When you buy life insurance, you want the funds to help your loved ones. Reviewing your beneficiary designations can help you ensure that this is what happens.
Here are some situations when you should review your designations:
- You get married. If you just got married, you probably want to name your new spouse as the primary beneficiary. If you have stepchildren through the marriage, also consider whether you want to name them or, in the case of minor children, a trust set up for them.
- You get divorced. If you’ve gotten a divorce, you may no longer want your ex-spouse to be named as your beneficiary. On the other hand, you may be ordered by a court to buy life insurance naming your spouse as a beneficiary in order to ensure continued support.
- You have a child. Many people buy life insurance to provide for a child. Because it’s not advisable to name a minor as a beneficiary, you may need to set up a trust or take other estate planning actions as well.
- Your beneficiaries experience challenges. Let’s say you name your adult son as a beneficiary. Then your son develops drug addiction. You still want to provide for your son, but you are now worried that a sudden windfall could make matters worse. In this case, you may need to review your other options, such as establishing a trust and naming the trustee as a beneficiary.
- It’s been a while. If you purchased a policy years ago, you might not even remember who you named as your primary and contingent beneficiaries. It’s better to be safe than sorry. Go ahead and review your beneficiary designations and make sure they still reflect your wishes.
Choosing the right life insurance beneficiary designation is an important part of financial planning. Everyone’s circumstance is unique, and a financial planning expert can help you with your situation. If you need help with life insurance or financial preparedness, we’re here to help. Learn more about our financial planning services.