Life insurance is generally used for two purposes. Its primary use is to create financial protection for your loved ones should you die unexpectedly. Life insurance is also purchased for managing your estate taxes.
Naming a beneficiary for your life insurance policy is the next important step you will take after choosing the right policy and the right amount of coverage for your needs. Many people have questions, and here, we provide you with answers to a few of the most common questions related to designating your beneficiaries.
Who is a beneficiary?
A beneficiary is the recipient of your death benefits or the proceeds of your life insurance policy. A beneficiary can be a person or an organization, such as a favorite charity.
Can I choose multiple beneficiaries?
There are primary, secondary and third (or final) level beneficiaries. Most designate their spouse or close family members as their primary beneficiaries. In a case if you and the primary beneficiary die, the proceeds will go to the secondary beneficiary. If second beneficiaries are not named, and the primary beneficiary is deceased, the proceeds will go to your estate. If the primary and the secondary beneficiaries are deceased, then the third beneficiary would be entitled to the death benefits.
There is no legal restriction on the number of beneficiaries you can have. If the primary beneficiaries are multiple, you can designate the percentage of proceeds that should go to each one. For instance, if you want to include children from another marriage, you could specify their names as primary beneficiaries and pre-determine the percentage of proceeds that should go to them after you die.
Can I change my beneficiary?
When you name your beneficiaries, you have a choice of making the names revocable or irrevocable. You can change your beneficiary only if the name is revocable.
Irrevocable beneficiaries are locked in and the name can be changed under very few circumstances. If you live in a community property state, you should be aware that designating your death benefits to someone other than your wife requires a written consent from your spouse.
Most people choose the revocable option, but you would still need to go through a formal procedure for changing your beneficiary. You will need to fill out a beneficiary form revoking the old beneficiary and installing the new beneficiary’s name. Should you re-marry, you would naturally want to revoke the name of your previous spouse as the beneficiary of your life insurance policy, and replace it with your current spouse’s name. Most states will allow you to change the beneficiary, even if it was irrevocable, from your ex-spouse to your current wife’s name.
Remember, life insurance companies are strict about giving proceeds from a life insurance policy only to those named as beneficiaries. Even your will cannot override the beneficiary designated in your life insurance policy. You should be careful, to update your beneficiaries, particularly when you re-marry or add more children to your family. Leaving a name out, even by accident, could leave that child without any proceeds.
Will my beneficiary have to pay taxes?
All proceeds of a life insurance policy are free from tax. However, proceeds from your life insurance policy may be included in your gross estate for estate tax purposes if your beneficiary is a creditor, has been appointed under an agreement to pay your estate debts or other estate expenses, or receives proceeds as alimony or support. Unless the executor of your estate is your spouse or child, naming an executor as your beneficiary would result in proceeds being included as part of your estate, liable to estate taxes.
Can I name a minor as my beneficiary?
Generally, life insurance companies will not pay out to a minor. If you want to name a minor as your beneficiary, you should create a Trust or appoint a custodian/guardian. In the event of your death, the proceeds will be managed on behalf of your child by a Trust or guardian until such time your ward reaches legal age. If you have more than one child you should designate the portion of proceeds to be given to each child.
Conclusion
If you want your life insurance proceeds to reach the right beneficiary without any delay after your death, it is important to name your primary and secondary beneficiaries, and make modifications according to the changing circumstances in your life.
While you’re updating your beneficiaries, you might as well check whether your life insurance coverage is adequate for your current needs. If you have paid off some of your loans or put your kids through college, you may be paying high premium rates for a large coverage you no longer need.
Or, you may want to shop around to find the best life insurance quotes. Since life insurance is such competitive business, you may find a carrier that will give you better life insurance rates than your existing policy. It’s very easy and convenient to find reliable and free life insurance quotes online using BBB-accredited life insurance quote providers!