Life insurance is critical when it comes to securing the welfare of your family, especially now in the midst of a global pandemic and financial instability. However, as important as it is to have life insurance, it’s equally important to choose the right beneficiary. You want to ensure it’s someone trustworthy and will use the funds the way you’d want them to. However, sometimes it can be difficult to go through all the loved ones in your life and single out just a few options, but it’s essential to take great care when choosing the right beneficiary for your life insurance.
What is a Life Insurance Beneficiary?
Before choosing a beneficiary, you must first understand what this role entails. A beneficiary is a person or entity you designate to receive the life insurance payout – or “death benefit” – upon your passing. Ideally, when choosing a beneficiary, it should be someone with “insured interest” – meaning someone who would face financial hardship in the event of your death. This can include:
- Family members, such as spouses, domestic partners, siblings, and children
- Legal guardians who’ve been granted permanent custody
- Divorced spouses with financial dependencies, such as children or outstanding property settlement
- Business partners, especially if you’re deemed a key person
To discover the other necessities of life insurance and what occurs after your passing, read our article, Life Insurance: The Basics.
How to Choose a Life Insurance Beneficiary
Choosing your beneficiary is largely based on how you wish the life insurance death benefit to be used. For instance, if you have children, you may designate your partner to be the beneficiary so they can provide for them. Alternatively, you can name a charity as the beneficiary if you want the funds to back a specific cause. You can even have multiple beneficiaries which can be ordered into different categories:
- Primary: The primary beneficiary is the first to receive the death benefit. You can elect multiple primary beneficiaries and grant each a percentage of the funds.
- Contingent: These persons or entities are the second in line to receive funds – for instance, in the event the insured and primary beneficiary pass simultaneously.
- Tertiary: Should you name a tertiary beneficiary, this would be the third in line to receive the death benefit in the absence of both the primary and contingent beneficiary.
Keep in mind, the amount your beneficiaries receive often depends on the type of life insurance policy you choose.
What Occurs After Choosing a Beneficiary?
After you choose your beneficiary and inform them of their role, there are ways to prepare them for what may come in the future. Although it’s an uncomfortable situation for some, you should review your policy together, outlining what they can expect regarding life insurance estate taxes, what type of life policy it is, and how to file a claim. You can also update your policy as circumstances evolve, such as in the event your beneficiary passes, you go through a divorce, or you have a child. To ensure your priorities align with your policy, get in the habit of reviewing your policy yearly, especially a term policy.
Choosing the right beneficiary requires a level of mutual trust and should reflect your values. You want to have the benefits of your investment spent responsibility. Of course, choosing the right beneficiary is just one piece of the puzzle. TJ Woods Insurance can help you with the most important part: outfitting you with the right life insurance policy. If you’re interested in finding ways to safeguard your family’s financial stability in the unfortunate event of your passing or want to know about COVID-19’s impact on life insurance, don’t hesitate to contact us.
