An insurance beneficiary is an individual who will receive the money from the policyholder’s death benefit when the policyholder pass away. When purchasing an insurance policy, you designate the beneficiary of the policy, which could be a child or a spouse, for instance.
If your policy has a revocable beneficiary, you can change the beneficiary anytime without needing approval from the current beneficiary. On the other hand, if your policy has an irrevocable beneficiary, you must get permission from that beneficiary before making any changes.
Who Is An Insurance Beneficiary?
As stated earlier, a beneficiary is the person or people who receive the life insurance payout when you pass away. The insurance company pays them based on the names listed in your policy, not according to your will or family preferences.
You can name more than one beneficiary and decide how much each person should get. This payout can provide important financial support for your family, a business, or any other group you choose.
How Does Insurance Beneficiary Works?
Naming a beneficiary is important because it decides who gets your assets after you pass away. You can choose a person or an organization, but there might be certain rules before they can receive the assets, like needing to be a certain age or marital status.
It is also good to know that some financial assets may come with tax implications. Most life insurance payouts are not taxed, but any interest earned could be. If you don’t name beneficiaries for your accounts, the financial institution may decide how your assets are shared. And if you leave them out of your will, your property might go through a long probate process. In that case, the state where you lived could end up deciding who gets what.
Who Can Be Your Insurance Beneficiary?
Selecting a beneficiary is a personal decision that depends on your values and financial situation. You can choose any person or entity as your beneficiary, like a spouse, child, trust, or charity.
Child
If you have dependent children, life insurance benefits can help cover their future college education after you’re gone. But if they are under 18 or 21, depending on your state, they can’t be named as direct beneficiaries. In that case, you can set up a trust or choose an adult custodian to manage the money. The trust or custodian would then be listed as the beneficiary on your policy.
Spouse
Also, think about how your spouse would handle finances if you passed away. Life insurance can help pay for things like the mortgage, long-term debts, or funeral costs.
In some states, you need your spouse’s permission before naming someone else as your life insurance beneficiary.
Charity
If you have a life insurance policy, you can choose to name a charity as your beneficiary. This means when you pass away, the payout will go to the charitable organization or cause you selected.
Extended Family
If you are married, you might choose to name your spouse as your beneficiary. If you are single, you can name anyone who depends on you financially or has a close connection to you.
In some states, if the person is not related to you, they must have a financial relationship with you, like sharing rent or living expenses. This is called having an insurable interest.
Your Business
You can name your business as your beneficiary, or business partners can name each other. This helps make sure that if something happens to you, your partner can afford to buy your share of the business. The insurance payout can also help keep the business running while your successors find a new owner.
Multiple Beneficiaries
If you want to name more than one beneficiary, you need to decide how much each person should receive. Some policies may limit how many beneficiaries you can list. If you don’t name anyone, the policy usually names your estate as the default beneficiary.
It’s a good idea to ask your insurance provider who the default beneficiary would be on your policy.
How To Choose An Insurance Beneficiary The Right Way
Meanwhile, naming a life insurance beneficiary is an important way to provide financial support for those who may need it after you’re gone, like a spouse or adult children. To do this, you just need to follow three simple steps:
Designating a Beneficial
There are only two options when designating a beneficiary, which are as follows:
- Revocable Beneficiary: With a revocable beneficiary, you can make changes to the beneficiary at any time. This is someone you name to get your life insurance payout when you die. But you can remove or replace them anytime, for any reason, without telling them or needing their signature.
- Irrevocable beneficiary: An irrevocable beneficiary cannot be altered or have their share of the death benefit changed without their consent. If you decide to cancel the policy, you must also notify an irrevocable beneficiary.
Deciding How the Death Benefit Will Be Paid
When deciding how the death benefit will be paid to beneficiaries, you have two options to make. Below are the options:
- The first is per capita, which means the money is divided equally among all the beneficiaries, often used for children.
- The second is per stirpes. This means if a child dies before you, their share goes to their children, your grandchildren. This method helps protect grandchildren, especially if they have lost a parent.
Setting Up a Trust
Setting up a trust is a good way to protect your grandchildren or other loved ones. The life insurance money usually goes into the trust and is distributed according to the trust’s rules.
Conclusion
To make sure your financial assets are shared properly, it is important to name beneficiaries for your insurance accounts. By doing this, you can be confident that your property will go to the right people.
