Most people purchase life insurance with the express purpose of protecting their loved ones from financial hardship in the event of their deaths. For this reason, many people already have a strong inclination about who they will name as their beneficiary before they even purchase their policies. For some people in different life circumstances choosing a beneficiary may be a much more complicated matter. At the same time even people who already have a beneficiary in mind may benefit from a little more reflection before the make it official. What follows is a list of several important factors to consider when choosing a life insurance beneficiary.
What Is a Life Insurance Beneficiary?
The first thing to understand about life insurance beneficiaries is what one is. A beneficiary is the person who will receive the death benefit from the life insurance policy at the time of your death. Thus, if you are insured for $1 million in life insurance the beneficiary is the person who will receive the $1 million after you die.
Is the Person a Minor?
One of the most common mistakes people make when choosing a life insurance beneficiary is in selecting a minor, especially a minor child. This is understandable since the welfare of a child, especially a young one, is paramount to most people. A minor is not legally able to receive the death benefit so payment might be postponed until the minor reaches the age of majority or until a legal guardian has been appointed.
Who Will Suffer Financially from Losing You?
A key factor in choosing a beneficiary is to consider who will suffer financially from your death. This will of course generally include anyone who is financially dependent on your income or assistance to some extent. Often this will be a spouse or significant other, an elderly or disabled family member, or as in the consideration above a child. Below we will examine solutions for providing for an underage child.
Will That Person Make Good Decisions?
Another major factor is whether or not the beneficiary you have in mind is the type of person who is responsible and level headed, thus someone who can make good decisions. Again if the person is an underage child, an elderly relative suffering from dementia, someone suffering from a mentally disabling addiction or disability, etc., then this person may not be able to make sound decisions about how to handle the death benefit and plan for their own future.
Do You Want a Trust or an Individual As Your Beneficiary?
In the cases listed above regarding an underage child or a person unable to make informed, responsible decisions a good alternative is to name a trust as your beneficiary rather than that individual. With a trust a separate party who has the skills and capacity needed to make decisions can be appointed to oversee the trust and to handle the minor’s or incapacitated person’s expenses on their behalf.
What’s the Nature of Your Relationship with the Person?
Many people own life insurance policies for many years, even several decades. As a result it is common for some types of relationships to come and go during that time. Someone who was once significant in your life, or who once depended on you financially, may no longer be in that role. As a result it is usually better to choose beneficiaries with whom you have a permanent relationship. Even then, it may be necessary to re-evaluate your beneficiary from time to time as life circumstances change.
What’s the Person’s General Health and Age?
Related to the previous consideration is the potential beneficiary’s general health and age. Often you may want to provide for the person financially precisely because advanced age or physical or mental decline prevents them from supporting themselves. Elderly or unhealthy people may not outlive you and may never have the chance to receive the death benefit to begin with. As a result it is once again often necessary to select a trust as your beneficiary and/or to update your beneficiary as the years go by.
Will There be Multiple Beneficiaries?
So far we have considered instances of single individuals as beneficiaries, however, you also have the option of selecting multiple beneficiaries if needed or desired. This is ideal for people who have multiple individuals depending on them financially or who have large families. You can also select secondary beneficiaries who will receive the death benefit if your primary beneficiary dies first.
Who Will Handle Your Funeral and Estate?
Another important consideration, particularly if you don’t have someone otherwise financially dependent on you, is who will handle your funeral expenses and estate in the event of your death? Since this person may incur personal expense it often makes sense to name him or her as your beneficiary as a means of compensating them for the expense.
Considerations about naming a life insurance beneficiary is just one of the many important things to consider when purchasing life insurance. It is also important to correctly gauge how much life insurance you will need – in other words what size death benefit your beneficiary will need to be okay financially – as well as what size premium you can afford and what general type of life insurance policy you want to buy. As always, at Beaty Insurance we are happy to provide information and guidance to our clients who have questions about life insurance.