Learn and Plan | 8 questions to ask when choosing a beneficiary
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8 questions to ask when choosing a beneficiary

Jun 16, 2021, 9:32:52 PM | Reading Time: 5 minutes

Deciding who gets your money when you pass away isn’t always just a matter of selecting a person. Your life insurance policy rules and state laws may affect or even restrict your choices. So, when deciding who your life insurance beneficiary should be, it’s important to ask yourself eight questions before choosing a beneficiary.

1. What is the purpose of my policy?

Typically, a life insurance policy provides financial security for loved ones after a person dies, especially if the family relies on his or her income. But you may have another reason, such as a company or business that you want to make sure continues in your absence. Maybe you want to leave behind money for your child’s education or make sure the estate and inheritance taxes are covered on any assets your heirs receive. You may want to ensure your funeral service is covered, or your debts can be paid off, so your family isn't stuck with the costs. Make sure to consider the reasons you have for purchasing life insurance when choosing your beneficiary.

2. What are my options for a beneficiary?

Remember that you have options beyond your immediate family when it comes to choosing a beneficiary. Some examples of beneficiaries include:

  • A single person
  • Two or more people 
  • The trustee of a trust you’ve established
  • Your estate
  • A non-profit or charity

Once you’ve figured out who you’d like to be your beneficiary, be sure to get as much specific information about that person as possible – full name, Social Security number, date of birth, address, phone number, and the nature of the person’s relationship to you – so your life insurance company can easily locate him or her.

When you’ve decided on who will receive your assets, the next step is to figure out how they will be distributed. If you have multiple beneficiaries, it’s a good idea to seek help from legal counsel or a financial advisor with the process.

3. Should I name my children as beneficiaries?

If you die while your kids are still minors, they may not be eligible to receive the funds until they reach the age of 18. This delay can be detrimental if they need your death benefit for living expenses. There are a couple of ways to ensure your children can have immediate access to your assets: 

Establish a trust

Trusts are a good solution for leaving money to your children. You can set up a life insurance trust and name a trustee to oversee the funds and distribute the money to your children, or whomever you wish. There are costs involved with setting up a trust.

Appoint a guardian

Legal guardians are allowed by many states to receive a death benefit on behalf of minors. You can appoint a legal guardian while you’re alive and the state must grant him or her the legal rights to manage the child’s finances. Appointing a guardian can be expensive and might take a while, so talk to a lawyer before you start the process.

4. When should I change beneficiaries?

Major events like marriage, having a child, and getting a divorce are just a few things that can affect who you might want as your beneficiaries. It’s a good idea to review your beneficiary designations on your life insurance policy every year or so to make sure you’ve selected the right person or persons to inherit your assets. If you don’t keep your beneficiaries up-to-date you may risk leaving your money to someone who died or someone you don’t want to have your money, like an ex-spouse. Your life changes and so do the lives of your loved ones, so make sure your policy takes into account events at every stage.

5. How do state laws affect my beneficiary choices?

Your state may have laws about beneficiaries that you aren’t familiar with. For example, in some states, like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin have community property laws, and three other states — Alaska, South Dakota, and Tennessee — have elective community property laws. These laws give couples equal ownership of their joint property. If you want to designate someone besides your spouse as a beneficiary, your wife or husband will need to sign a waiver. Make sure you research the laws in your state or talk to a financial advisor about the rules your beneficiary choices may be subject to.

6. What happens if I don’t name a beneficiary?

Life insurance policies vary and there could be a specific order of distribution in your plan should you leave the beneficiary box blank. If you don’t name a beneficiary, your life insurance death benefit may go to your spouse. There’s also a good chance that your insurer could issue the death benefit to your estate and a court will decide how to handle the funds. It could take time for the money to be distributed to those you love who need it. The process can also be expensive, and the cost would come out of your funds.

7. Does my will override my life insurance policy?

To ensure your wishes are honored, make sure your will matches your life insurance policy. You can’t use your will to modify your life insurance policy, so if you named someone as a beneficiary of your life insurance, that person will receive your death benefit. Your life insurance beneficiary designations will supersede the will in almost every case because it’s a contract.

8. What happens if my beneficiary dies before me?

You should be prepared for the possibility that your primary beneficiary might die before you, can’t be located, or refuses the proceeds at the time of your death. By naming a secondary beneficiary you can ensure your assets pass directly to that person if need be.