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.

family choosing a life insurance beneficiary

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 get them entangled in a messy legal battle?

The answer is to carefully consider who or what you designate as beneficiaries of your life insurance policy. This should be much easier 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 as a revocable beneficiary allows the policyholder to change the designation without consulting them. But declaring someone an irrevocable beneficiary means you must get their OK before dropping 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 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 make this mistake. Anyone in your life that's ever had one of those titles could be declared a beneficiary. And some of them may not be who you consider to be your true beneficiary. There's also a good chance that these decisions will be made in court. And that gets expensive. Much of your estate could wind up paying legal and lawyer fees.

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

If your goal is to put your money into the hands of anyone in particular, 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." Listing just your favorite child, or just your oldest child, can create issues when it comes time to divvy up your bank account. That's because 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. One reason being that life insurance companies don't pay out to minors. If you don't handle this kind of situation in the right way, the court will appoint a guardian to handle your inheritance until your heirs reach a certain age. This usually means 18 or 21 depending on the state.

You can avoid this by setting up a trust that will benefit the minor you want to provide for. 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

There's no point in picking out beneficiaries and then failing to let them people know. But a lot of people keep both their policies and their beneficiary designations a secret.

Don't make things difficult for your beneficiaries. 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.

Experts recommend pulling out and taking a look at your policy after any major life event, like:

  • Marriage
  • Divorce
  • Death,
  • Birth

Experts also suggest doing this every few years, even if you haven't experienced any life changes.

Ask for help if you need it

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 and asking for help.

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

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