Who is your life insurance beneficiary? Did you do it right?
Congrats! If you are considering who you want to name as your life insurance beneficiary, you have already taken the biggest step towards purchasing life insurance, knowing you need it! Whether it is a whole life insurance policy or a term life insurance policy, you will need to name a beneficiary. Bridge First Insurance is here to help you decide on a life insurance beneficiary and to bring attention to some avoidable mistakes.
There are four interested parties in a term life insurance or whole life insurance policy:
- The insured
- The beneficiary
- The owner
- The payor.
The break down is pretty simple. The named insured is the person the policy is on, and if he or she passes away, the policy is paid out to the beneficiary. The owner is the person who takes out the policy, and the payor is the person who is paying for it.
For example, your mother, the owner, takes out a life insurance policy on you, the insured. Your father, the payor bought the policy to be paid out to your wife, the beneficiary, in the event of your untimely death.
New homeowners are one of the most common life insurance purchasers. In the event of an insured’s death, a term life insurance or whole life insurance policy would pay off the home so that the spouse and/or children aren’t displaced. In this scenario, the homeowner is typically the owner, payor, and insured, and the spouse is the beneficiary.
Naming a Beneficiary
Typically, choosing a life insurance beneficiary isn’t a tough decision, but there are some factors you need to take into consideration when making such a big decision. A life insurance beneficiary will receive the death benefit of your policy. Most people will choose a trusted loved one or someone who may be dependent on their income to survive after they pass away. Some states require you to have an insurable interest, which prevents people from taking a policy out on a random person who may be in poor health, then collecting on the policy, as well as other potentially fraudulent situations.
Many states have other regulations. For example, a life insurance beneficiary can be revocable or irrevocable. The policy owner can change a revocable beneficiary at almost any time, but an irrevocable beneficiary requires the approval of the beneficiary.
Life insurance beneficiaries are broken into two categories: the primary beneficiary and contingent beneficiary. The primary beneficiary is the person or persons that the client chooses to receive the death benefit. For example, a husband chooses his wife. The contingent beneficiary is the secondary choice, should something happen to the primary beneficiary at the same time as the named insured.
For example, if the husband and wife are killed in a car accident and the husband’s brother is the elected contingent beneficiary, he would receive the death benefit, but the contingent beneficiary only receives the death benefit if something happens to the primary beneficiary.
It is important to note that the client may choose more than one primary or contingent insurance beneficiary. The client decides how much each insurance beneficiary will receive based on percentage of the death benefit. The reason this is decided based on percentage and not dollar amount is that many whole life insurance policies can increase in dollar value. For example, a woman names all three of her children as primary beneficiaries, and she decides that she wants to leave one of her daughter forty percent and the other two children each thirty percent.
Situations to avoid
One potential scenario most clients want to avoid is having the life insurance policy become part of their estate. When a life insurance policy becomes part of an estate, it is subjected to probate and the legal process to settle the estate. One of the main benefits of life insurance is that it is tax-free. When it becomes part of your estate, however, it becomes taxable. Another huge advantage of life insurance is that it is paid out almost instantly after a death certificate is produced. If the policy becomes part of the estate, the process to settle can be lengthy. It is common for people to have a difficult time paying for funeral expenses without the life insurance benefit, so you can see why having designated beneficiaries is so important.
How can you avoid having your life insurance become part of your estate? The first thing to do is keep your life insurance beneficiaries up to date. Be sure to check on your policy every year or so to make sure that everything is current.
Another common situation leading to the client’s life insurance becoming part of their estate is naming a minor as a beneficiary. Life insurance companies can’t just hand, what is often a large amount of money, over to a minor. If you want to leave the money to your young children, make sure you have a trust set up, or a responsible and legally designated guardian, who can hold on to it as they mature.
Lastly, and perhaps the most important thing to do after you buy your life insurance policy, is to make sure you keep a copy of the policy somewhere safe so it can be found easily. Also, tell someone about the policy. If you die and no one knows the policy is out there, they could end up never filing a claim, and the life insurance company could never pay out the benefit. This is pretty much the worst situation imaginable.
Life insurance is a contract and should be respected as such. Even if you have a will that contradicts it and indicates the policy should be divided differently, it will be paid out according to the contract. Anyone purchasing life insurance should consult an independent insurance agent, like the team at Bridge First Insurance, to guide them through key decisions, like what type or policy, term life insurance or whole life insurance, how much coverage is needed, and even who should be named as beneficiaries.
Jack has achieved success in the insurance industry through a consultative and honest approach to clients. He designed this approach around educating clients on important coverage and allowing them to decide what policy would best fit their insurance needs. In 2013, Jack and co-founder Dave Zappacosta, established Bridge First Insurance, as an independent insurance agency operating in Virginia, DC, and Maryland.