How to Choose a Life Insurance Beneficiary

Designating beneficiaries for your life insurance policy is a big deal. Learn how to choose beneficiaries and avoid making mistakes that could lead to problems down the road.

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Most of us buy life insurance so we can financially provide for the people—and sometimes the organizations—we love should we pass away.

As a result, picking the right beneficiaries is a pretty important part of that whole process. But how do you do that, and how do you do it without making mistakes that can cost your loved ones money or even cause them to become entangled in a messy legal battle?

The answer, or at least part of it, is to carefully consider who or what you designate as beneficiaries of your life insurance policy--a feat you should have an easier time accomplishing after reading through the following pieces of advice.

The Basics

For starters, you should know that you can name any of the following as life insurance beneficiaries:

  • People
  • Trusts
  • Charities
  • Your estate

You can add pretty much any person you want to your policy as a beneficiary, by the way--family members, friends, acquaintances, even complete strangers. Actually, you can avoid humans altogether, if you'd like, as a surprising number of folks have listed beloved pets as beneficiaries over the years.

Also, you're able to name more than one person as a beneficiary, so don't feel the need to stop with your favorite child or your only niece. In fact, most experts would suggest attaching at least a primary beneficiary and a contingent beneficiary to your policy.

What are primary and contingent beneficiaries, you ask? Primary beneficiaries are people who will receive the proceeds of your estate when you pass away. Contingent beneficiaries, on the other hand, are people who will only receive money if the primary beneficiaries pass away before the policyholder does.

To complicate matters even more, each of the above can be categorized either as revocable or irrevocable beneficiaries. Declaring someone--or a couple of someones, should the need arise—as a revocable beneficiary allows the policyholder to change the designation without consulting him or her (or them), while declaring someone an irrevocable beneficiary means that you have to get their OK before you can drop them from your policy.

8 Steps to Beneficiary Success

With the basics out of the way, here are some of the things you'll want to consider when deciding who to designate as your life insurance policy's beneficiaries.

Start by contemplating who could benefit most from your inheritance

After all, the whole point of taking out a life insurance policy is to provide for the futures of the people—or organizations, or animals—you love, right?

If so, you should begin by thinking about whose futures are most in need of being provided for—perhaps because they're currently dependent on your financial support. Maybe you have children who could use a helping hand while attending college, or maybe you have siblings or even parents with medical bills that will need to be covered. Another possibility: you want to reward various relatives who will be responsible for certain expenses after you pass away.

Be specific

Far too many people make the mistake of listing "my wife" or "my spouse" or "my children" as their life insurance beneficiaries. Don't be one of those people—unless, of course, you want to make the lives of those loved ones a miserable mess while all of the folks in your life who answer to those titles work out (in the courtroom, potentially) the details of who gets what.

Along the same lines, you'll probably want to avoid listing your "estate" as a beneficiary if there are specific people who you would like to receive an inheritance. Instead, go out of your way to include the individual names and other needed details of anyone who you want to be a beneficiary on your policy.

Also, don't skimp on the details

Speaking of the above, if your goal is to put your money into the hands of any people in particular should something happen to you, be sure to go beyond listing just their names.

Among the other details you'll want to include on your policy, if possible: their Social Security numbers, their dates of birth, and their current addresses.

Doing this legwork now will keep your insurance company from having to hunt down your beneficiaries if you pass away.

Payout specifics often are important, too

Assuming you designate more than one beneficiary, you'll probably want to set in stone how much each of those people will receive after your passing.

For example, do you want each beneficiary to get the same amount of money, or would you like different beneficiaries to get different percentages of your proceeds? Whatever the case may be, this is the place and time to make that kind of declaration.

You'll probably want to avoid playing favorites

This piece of advice goes hand in hand with the one that was mentioned earlier about "being specific." That's because, say, listing just your favorite child, or just your oldest child, can cause more than a couple of issues when it comes time to divvy up your bank account—assuming your intention was for that child to distribute it equally to his or her siblings—as there would be nothing keeping your son from pocketing all of the money for himself instead of distributing it per your wishes.

Do your homework before you get too deep into the process

Depending on which state you live in, you may be limited as to who you can name as a beneficiary of your life insurance policy. (An example: in some states, you can't name someone other than your spouse as a beneficiary without that spouse's approval—which is obtained in the form of a signed waiver.) Your insurance company may put some of the same restrictions on you, so make sure read the fine print of your policy before you finalize everything.

Think again if you're thinking of making any minors beneficiaries

There are a few reasons for this, with one of them being that life insurance companies don't pay out to minors. As a result, if you don't handle this kind of situation in the right way, a guardian will be appointed (by the court) to handle your inheritance until the child in question reaches a certain age (18 or 21, depending on the state).

The way around that costly and annoying hurdle is to set up a trust that will benefit the minor you want to provide for and then list that trust as the beneficiary of your policy. Or you can name a reliable adult who will act on the child's behalf until she is old enough to handle things herself.

If you have a will, make sure it and your designated beneficiaries don't conflict with each other

Another mistake that is surprisingly common involves people listing different beneficiaries on their wills and their life insurance policies. That's problematic because what you say on your life insurance policy almost always will trump whatever is said on your will. There are certain exceptions, especially when spouses are involved, but in general you should expect that your life insurance will override your will if push comes to shove.

Steps to Take After You've Decided on Your Beneficiaries

All of the pieces of advice shared above relate to what you should keep in mind while selecting and naming life insurance beneficiaries.

The three suggestions below, on the other hand, are tied to some of the steps you should take after your policy's beneficiaries have been named. 

Let people know if you've made them beneficiaries

Most people would agree that there's no point in picking out beneficiaries and then failing to let those people know about their status, but the fact is a lot of people keep both their policies and their beneficiary designations a secret.

Unless you'd like to turn the lives of your beneficiaries-to-be upside down for a good amount of time should the unthinkable happen, you should let them know about their status as well as where your policy can be found in the event of your passing.

Keep your policy—and its list of beneficiaries—up to date

Far too many people who purchase life insurance never review or update their policies, which most experts consider a big no-no.

As for what they'd prefer those people to do instead, pulling out and taking a look at your policy—and your list of beneficiaries--after any major life event, like a marriage, divorce, death, or birth, is sure to be at or near the top of their lists. Doing the same every few years, even if you haven't experienced any particular life changes, is also highly recommended.

Ask for help if you need it

As is pretty much always the case when it comes to dealing with any form of insurance, if at any point in the process of naming or changing a life insurance beneficiary you become confused or you have a question that needs to be answered, don't be shy about contacting your agent—or an attorney, if need be—and asking for help.

Just a few minutes of that person's time could be the difference between the people—or organizations, or pets—you love being able to enjoy your inheritance and being wrapped up in a protracted legal battle over your assets.

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