Deciding who gets your death benefit 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. When deciding who your life insurance beneficiary should be, here are eight questions to consider before choosing a beneficiary.
Typically, a life insurance policy provides financial security for loved ones after a person dies. There may be other reasons as well, such as a company or business that you would like to continue 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.
There are options beyond your immediate family when it comes to choosing a beneficiary. Some examples of beneficiaries include:
Once you’ve determined 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 or tax id 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 death benefit, 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.
If you die while your children are still minors, they may not be eligible to receive the funds until they reach the age of majority. 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:
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 – talk to a lawyer for assistance.
If a minor is the beneficiary on your policy, a court-appointed legal guardian may be designated to oversee the death benefit. This process can be lengthy and complex, so talk to a lawyer before you start.
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 beneficiary. It’s a good idea to review your beneficiary designations on your life insurance policy every year or so to make sure the person or persons that you want to receive the death benefit are set up to do so. Your life changes and so do the lives of your loved ones, a periodic policy review can take into account events at every stage.
Your state may have laws about beneficiaries. For example, 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. Research the laws in your state or talk to a financial advisor about the rules your beneficiary choices may be subject to.
In some cases, there may be no beneficiary listed. It’s rare and often a company likely won’t issue a policy without a named beneficiary. If you don’t name a beneficiary, your life insurance death benefit may go to your spouse or estate. If all beneficiaries have pre-decease you, your insurer could issue the death benefit to your estate and a court will decide how to handle the funds.
Your life insurance beneficiary designations will supersede the will in almost every case. 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.
There is a 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 death benefit passes directly to that person.
The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.
Neither Midland National nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.