Who Should Be Your Beneficiary?
It’s easy: Fill the blanks in on the life insurance application and you’ve designated a beneficiary. But do not write off the task as insignificant. Designating the right individual to receive the proceeds of your life insurance policy is a vital decision that could have long ranging impact on your loved ones.
Why is picking a beneficiary important?
Particular accounts require you to designate a beneficiary, like life insurance policies, pension plans, and/or retirement accounts. Upon your passing, proceeds from those accounts are going to typically go directly to the beneficiaries and avoid probate in which helps your beneficiaries bypass some formalities.
Things to think about when deciding on a beneficiary
Deciding on a beneficiary is a very personalized decision, and very different for each individual. In many cases, individuals wish to use a death benefit to safeguard their loved ones, and others might view it as more like a financial transaction. Below are some tips to take note of when you are deciding on your beneficiary.
- Insurable Interest. The individual or association designated as a beneficiary must have an insurable interest in the insured individual. Whereas the insured typically has the right to designate any beneficiary, there needs to still be a legitimate financial interest among the parties. In many cases, beneficiaries are reliant on the insured for financial support, like a spouse or dependent children, so there is a perceived financial interest and intent of insurance among the parties.
- Age. A lot of insurance companies, retirement accounts, and pension plans, are not going to pay benefits to a minor individual. A better choice is to devise a trust for them and designate a trustee to oversee the account until they reach a stipulated age you specified in the trust.
- Capability to manage money. When your beneficiary is unable to manage money, devise a trust and designate a trustee to invest and allocate funds on their behalf.
- Contingency. Designate an alternate beneficiary so should your initial beneficiary pass away before you, the account earnings pass directly to your alternate beneficiary bypassing probate.
- Options. Your beneficiary could be your spouse, child, or other individual(s); your trust; a non-profit or association. When you don’t designate a beneficiary, the assets you have are going to go into your estate and be allocated in accordance to your will.
- State or policy life insurance beneficiary regulations. Many states and/ or insurance companies might limit who you are able to designate as your beneficiary. Speak with an attorney to offer legal guidance for these state specific matters.
- Your estate as a beneficiary. It’s seldom suggested to designate your estate as a beneficiary, because doing so means those assets could be subjected to go through probate.
Do not “set it and forget it”
Since so many things change during life, go over your beneficiary designations every couple of years — and always following a life event like getting married, having a baby, adoption(s), a divorce, remarrying, or death — to be sure they’re up to date. Aside from that, you may risk leaving the earnings to your ex or an individual that has passed away before you.
Source:
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Writer, S. F. S. (2020, May 26). What to consider when choosing a beneficiary – State Farm®. State Farm. Retrieved February 8, 2022, from https://www.statefarm.com/simple-insights/life-insurance/what-to-consider-when-choosing-a-beneficiary
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