Life Insurance and Retirement Accounts
If you have life insurance or retirement accounts like a 401(k) or IRA, it’s important to name a beneficiary. Without a beneficiary designation, your retirement assets will be subject to probate and may not be distributed according to your wishes.
Life Insurance Beneficiary Designation
When you name a beneficiary for your life insurance policy, you’re essentially telling the insurance company who should receive the death benefit in the event of your passing.
You can name anyone as your beneficiary, including your spouse, children, parents, other relatives, or even a friend. It’s important to keep in mind that your beneficiary designation trumps any instructions you’ve given in your will.
Life Insurance Benefits: If you have life insurance through your employer, it’s important to designate a beneficiary for those benefits as well.
In most cases, you can name anyone as your beneficiary, including your spouse, children, parents, other relatives, or even a friend. However, there are some exceptions to this rule. For instance, if you’re covered by a military life insurance policy, your beneficiary must be a blood relative.
Making the Decision
Now that you know the basics of beneficiary designation, it’s time to make a decision.
There are a few things you’ll need to take into account, such as retirement accounts and other life insurance benefits. You’ll also want to consider your family dynamics and relationships.
Once you’ve taken all of these factors into consideration, you’ll be ready to name a life insurance beneficiary.
Your life insurance beneficiary is the person (or people) you designate to receive the death benefit from your policy in the event of your passing. Of course, no one wants to think about their own death, but it’s important to take the time to carefully consider your options and choose a beneficiary (or beneficiaries) who will be financially taken care of in the event of your death.
Choosing a Beneficiary
There are a few different options to consider when choosing a life insurance beneficiary. You can name:
- A spouse or domestic partner
- A child or children
- Other family members, such as a parent, grandparent, or sibling
- A close friend
- A business partner
- A trust
- A charity
There’s no “right” answer when it comes to choosing a beneficiary; it depends on your personal circumstances and who will be most impacted financially by your death. With that said, here are a few things to keep in mind when making your decision:
Check Your Policy Documents
First and foremost, check your life insurance company policy documents to see if there are any restrictions on who you can name as a beneficiary.
For instance, some employer-sponsored life insurance policies only allow you to name a spouse or child as a beneficiary. If there are restrictions on who you can name, you’ll need to comply with those in order for the death benefit to be paid out.
Update Your Beneficiary Designations Regularly
Finally, when choosing a life insurance beneficiary, it’s important to consider your financial situation. Take some time to assess your assets and debts and decide how much money your loved ones will need in order to maintain their current standard of living if you’re no longer there. Once you have a good idea of how much money they’ll need, you can purchase a insurance policy with a death benefit that will cover those costs (plus any outstanding debts).
No one wants to think about their own death, but it’s important to have a life insurance policy in place—and to choose a beneficiary carefully. By following the tips above, you can ensure that your loved ones are taken care of financially if something happens to you.
Now that we’ve gone over some general tips for choosing a life insurance beneficiary, let’s take a more in-depth look at each of the potential beneficiaries you can name.
Spouse or Domestic Partner
If you’re married or in a domestic partnership, your spouse or partner is usually the first person who comes to mind when you’re thinking about life insurance. And for good reason—if something happens to you, your spouse or partner will likely be financially impacted the most.
Of course, you’re not required to name your spouse as your beneficiary (you can name anyone you want), but it’s generally a good idea to do so. If you don’t name your spouse as the beneficiary of your insurance coverage there’s a chance that they could end up being completely financially responsible for any debts and expenses you leave behind—on top of grieving your death.
If you’re married or in a domestic partnership, make sure you understand how life insurance works in your state. For instance, some states have what’s known as “community property” laws, which state that any property (including life insurance policies’ death benefits) that’s acquired during a marriage or domestic partnership is considered joint property.
This means that your spouse would automatically be the beneficiary of your policy, even if you don’t name them specifically.
A Child or All Your Children
If you have kids, you’re probably already thinking about their future and how you can provide for them—even after you’re gone. One way to do that is by naming your child or children as the beneficiaries of your life insurance coverage.
Keep in mind that there are a few different ways to structure this. You can name one child as the sole beneficiary, which means they’ll receive the entire death benefit when you die. Or, you can choose to split the death benefit among multiple children, which is known as “equal division.”
Another option is to name a “contingent” beneficiary, which is someone who will only receive the death benefit if the primary beneficiary (usually a spouse or child) dies before you do.
Other Family Members
In addition to spouses and children, there are other family members you can name as beneficiaries of your insurance policy. This could include parents, siblings, nieces and nephews, grandparents, aunts, uncles, etc.
Keep in mind that naming a family member as your beneficiary is different from creating a trust (which we’ll discuss later). When you name a family member as your beneficiary, they’ll receive the death benefit directly—and they’ll be able to do whatever they want with it.
If you’re concerned about how your family member will spend the death benefit, you might want to consider setting up a trust (more on that below).
Charitable Organizations
If you’re passionate about a particular cause or charitable organization, you can name them as the beneficiary of your insurance policy. This is a good option if you don’t have any immediate family members or close friends to who you want to leave the death benefit to.
When you name a charitable organization as the beneficiary of your insurance policy, the death benefit will go directly to the organization—and they’ll be able to use it however they see fit.
Keep in mind that there are a few different ways to structure this. For instance, you can choose to have the death benefit go towards a specific project or program that the organization is working on. Or, you can simply give the organization the freedom to use the death benefit however they see fit.
Trusts
A trust is a legal entity that’s created for the purpose of holding assets—such as cash, investments, real estate, and life insurance policies—on behalf of another person or organization.
There are two main types of trusts:
1. Testamentary trusts: A testamentary trust is created through your will, and it doesn’t go into effect until after you die.
2. Living trusts: A living trust is created while you’re still alive, and it goes into effect as soon as it’s funded.
One of the benefits of setting up a trust is that it allows you to control how and when your assets are distributed after you die. For instance, you can set up a trust so that your children will only receive the death benefit from your insurance policy when they reach a certain age (e.g. 21, 25, 30, etc.).
Another benefit of setting up a trust is that it can help to protect your assets from creditors and lawsuits.
If you’re thinking about setting up a trust, it’s important to consult with an experienced attorney who can help you to choose the right type of trust for your needs and draft the necessary legal documents.
Naming a contingent beneficiary
In addition to naming a primary beneficiary, you can also name one or more contingent beneficiaries. A contingent beneficiary is someone who will only receive the death benefit from your insurance policy if the primary beneficiary dies before you do.
For example, let’s say that you name your spouse as the primary beneficiary of your insurance policy—but they die before you do. In this case, this would change beneficiaries and the death benefit would go to your contingent beneficiaries (assuming they’re still alive when you die).
You can name anyone as your contingent beneficiary—including family members, friends, charitable organizations, and trusts.
Final Thought
As you can see, there are a number of different options for naming beneficiaries on your life insurance coverage. The best option for you will depend on your unique circumstances and objectives.
Choosing a life insurance beneficiary is an important decision that shouldn’t be taken lightly. Be sure to check your policy documents for any restrictions on who you can name as a beneficiary, and update your designations regularly as your life changes. Consider your financial situation and purchase a policy with a death benefit that will adequately provide for your loved ones in the event of your passing.
If you have any questions about naming beneficiaries, or if you need help choosing the right beneficiaries for your life insurance policy, please feel free to contact us.
