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Everything You Need to Know About Life Insurance Beneficiaries

  • Corey
  • Nov 14, 2016

Life Insurance policies are meant to protect your loved ones in the case of your death. It is important that when you purchase a life insurance policy that you clearly name the beneficiary or beneficiaries whom will receive your payout. There are numerous legal, financial and tax-related issues that can arise when insurers make a life insurance payout. In any case, paying attention to the beneficiaries of your insurance policy will prevent potential headache for your loved ones in the face of tragedy.

Basics of Life Insurance Beneficiaries

There are two main types of beneficiaries: a primary and contingent.

– Primary Beneficiary: As the title states, this is the first or primary person(s) who will receive the proceeds of the life insurance policy in the case of the policyholder’s death.

– Contingent Beneficiary: Also known as the secondary beneficiary. This is whom will receive the funds if either the primary beneficiary has died before the policy holder, or if the primary beneficiary cannot be found.

Most professionals recommend that you have both a primary and contingent beneficiary. If a beneficiary cannot be located, your life insurance payout will go towards your estate.

The two classes of beneficiaries:

– Revocable Beneficiaries: The insurance holder can freely remove or change beneficiaries as they see fit without the consent of the beneficiary.

– Irrevocable Beneficiaries: The beneficiary cannot be modified by the holder of the insurance policy without the beneficiary’s consent.

How to Choose a Beneficiary

In the case of death, spouses and children are usually the first choice as primary beneficiaries. This is especially if you are still paying off the mortgage on the house and/or want to provide your children with funds for post-secondary education.

On the topic of dependents, it is important that if they are under the age of legal consent, you must designate a legal guardian for them. In some cases your insurance policy may require you to name the guardian as the beneficiary. In this case, the proceeds will not be paid until the court has legally appointed the guardian.

Some other beneficiaries you can name are trusts or charities. However, a trust must be previously set with a proper designation of trustees.

How to Name Multiple Beneficiaries

There are two ways in which you can split your life insurance policy:

– Per stripes: This will split your life insurance proceeds by ‘branches of the family or lineage’. Meaning the amount will be split equally among designated beneficiaries and/or the children of the beneficiaries in the case they pass away before the life insurance owner. For example, if you were to name two children Jack and Jill as beneficiaries, but Jack passes away before you. Jill would then receive 50 percent and Jack’s children would split the remaining 50 percent.

– Per capita: This will split your life insurance proceeds equally among your next of kin.
Ensure that if you decide to have multiple beneficiaries to designate distribution by percentage, not dollar amounts. Insurance policies can increase in value and if insurance companies do not have instructions for unaccounted amounts there could be legal battles among your survivors.

Why Not Estates?

You can name your primary or contingent beneficiary as your estate. However, estates are complicated, and before funds are disbursed, they must be approved by a probate court which can take time and has tax implications. On the other hand, if you have a direct beneficiary, your life insurance proceeds can bypass the courts and not be taxed. However, it is unavoidable that your payout goes to your estate in the case that none of your beneficiaries are present. This is why it is important that you set up a last will and testament then consult with a professional on how to tie in your life insurance policy to your estate.

Be Precise When Naming Beneficiaries

The most important thing when it comes to naming beneficiaries is to not be vague. If you want to name your spouse as your beneficiary don’t write ‘wife’ or ‘spouse’. Put in their legal name with a social insurance number so your will is clearly understood. Do not forget to update your beneficiaries in the case of a divorce or unforeseen circumstances.

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