When you purchase life insurance, a crucial step is selecting your beneficiary. What’s a beneficiary? It’s the person (or entity, like corporation or trust) who will receive the cash from your policy after you die.
While most people choose a specific person to be their beneficiary, there are several options you can select from. They are:
- A person, or people, usually your spouse and/or children
- A charitable organization
- Your estate
- A trust that you’ve set up, with a designated trustee who will administer the proceeds from your policy.
While you don’t have to designate a beneficiary, it makes the disposition of your estate much easier for your family and friends if you do. It also means that your cash benefits will be handled the way you choose, rather than the way your state’s laws determine they should be.
How do I choose the right person?
Once you’ve made the decision to name a beneficiary, it’s important to take the time to choose the right one. For some people, the death benefit from a life insurance policy will be needed by a surviving spouse, for others, it’s a purely financial transaction, with no particular identifiable need. If you’re married, it’s fairly typical to designate your spouse as your primary beneficiary and your child as a secondary one. If you’re single, a parent, sibling, or other relative might be a better choice, but, as outlined above, you can also choose a charity you feel strongly about, or even set up a trust.
What is this primary/secondary stuff?
A primary beneficiary is the first person “in line” to receive your death benefit. If your primary beneficiary dies before you, then your secondary beneficiary (sometimes known as a contingent beneficiary) is next in line after that. Some people even choose a final beneficiary as a safeguard in case they outlive both their primary AND secondary beneficiaries.
In most cases, however, only a primary beneficiary is necessary, because the vast majority of life insurance policies allow you to change your beneficiary at any time. As with any other kind of insurance coverage, you should review your life insurance policy at least once a year, and make any alterations necessitated by life changes, such as marriages, divorces, having children, or having children leave home.
Is there anything else I need to know?
Despite the emotional impact, choosing a life insurance beneficiary is fairly simple, but some states have a few restrictions. For example, if you’re married and want to designate someone other than your spouse as your beneficiary, he or she may have to sign a waiver.
If you’re not certain about the laws in your own state, or merely want advice about what works best for your situation, be sure to ask your insurance agent before you commit to a policy or designate anyone.
