An insurance beneficiary is the person who will get the money from your policy’s death benefit when you are gone. When you buy an insurance policy, you choose its beneficiary. Your beneficiary might be, for example, a child or a spouse. If you are the owner of an insurance policy with a revocable beneficiary, you can transform the beneficiary of your policy without consent from the current beneficiary.
On the other hand, a policy with an irrevocable beneficiary needs the policyholder to get the present beneficiary’s consent before making a change. In this article, you will learn everything you need to know about an insurance beneficiary.
What is an insurance beneficiary?
The beneficiary is the entity that will get the death benefit when you pass away. This payout is made by the insurance company as per the terms of the policy, and it goes to the beneficiaries named on it, regardless of what your family or your will says. You can choose more than one beneficiary and stipulate how much of the death benefit each person will get. Life insurance payouts can also assist in keeping businesses, families, or others afloat.
How Insurance Beneficiaries Work
It is important to name a beneficiary who will get your assets after you pass away. This can be an individual or organization of your choice. However, the beneficiary may need to meet certain criteria, like age or marital status, to inherit the property. It’s also important to know that there may be tax consequences for the beneficiary when inheriting certain financial assets. For example, while the principal of most life insurance policies is not taxed, the accrued interest may be.
If you do not name beneficiaries on your financial accounts, the financial institution that holds the assets may have to make decisions about the distribution of the assets. In addition, if you fail to name beneficiaries in a will, your property may be tied up in probate potentially for years, leaving the decision about how to allocate your assets up to the state in which you reside.
Who Can Be an Insurance Beneficiary?
Selecting a beneficiary is a personal decision that depends on your values and financial situation. You can choose any person or entity as your beneficiary, like a spouse, child, trust, or charity.
Child
If you have dependent children, life insurance benefits can assist in paying for their future college education when you are gone. However, those under 18 or 21, depending on the state, cannot be named as direct beneficiaries. In such cases, you may consider generating a trust or designating an adult custodian for the funds instead. This trust or adult custodian can then be named as the beneficiary of the policy.
Spouse
Consider how your spouse would be affected financially if you were to pass away. Life insurance benefits can cover expenses like your mortgage, long-term debt, or even your funeral costs. Note that some states need your spouse’s permission to name someone else as your life insurance beneficiary.
Charity
When you have an insurance policy, you can name a charity as your beneficiary. This means that when you are dead, the benefit from your policy will go to the charitable organization or cause that you have chosen.
Extended Family
If you are married, you may naturally choose to name your spouse as your beneficiary. However, if you are single, you can choose to name anyone who either depends on you financially or is connected to you as your beneficiary. Some states need unrelated beneficiaries to have a financial relationship with you, such as sharing rent or living expenses, which is known as “insurable interest.”
Your Business
You can name your business as your beneficiary, or your business partners can name each other as beneficiaries. This makes sure that if something happens to you, your partner can afford to buy out your share of the company, or your insurance proceeds can support your business while your successors look for a new owner.
Multiple Beneficiaries
If you choose to have multiple beneficiaries, you must choose what amount or percentage of the death benefit each beneficiary should get. Your insurance policy may reduce the number of beneficiaries you can select. If you do not choose a beneficiary, most life insurance policies typically name a default beneficiary, which is usually your estate. It is a good idea to check with your insurance provider to know who the default beneficiary would be on your policy.
How to Choose an Insurance Beneficiary
Naming a life insurance beneficiary is a crucial way to deliver funds for those who will need financial support when you are dead, such as a spouse or adult children. There are just three (3) steps you need to take, and they are as follows:
Designating a Beneficial
There are only two options when designating a beneficiary, which are as follows:
- Revocable beneficiary: You have the option to change the beneficiary at any time with a revocable beneficiary.
- Irrevocable beneficiary: An irrevocable beneficiary cannot be changed from the policy or have their share of the death benefit changed without their consent. If you cancel the policy, you must also inform an irrevocable beneficiary.
Deciding How the Death Benefit Will Be Paid
There are also two options when choosing how the death benefit will be paid to beneficiaries, which are
- Per capita (by “head”): The amount is divided equally among all beneficiaries, regularly among children.
- Per stirpes (by “branches”): If a child dies before the policyholder, the grandchildren will get the share that would have otherwise gone to the deceased child. This is known as “per stirpes” and can be beneficial in shielding grandchildren, especially if they have lost a parent.
- Setting Up a Trust
Setting up a trust is a great way to protect your grandchildren or any other loved ones. The life insurance proceeds routinely go into the trust and can be spread according to the trust’s rules.
Final Thought
To ensure the proper sharing of your financial assets, it is important to choose beneficiaries for your insurance accounts. By designating beneficiaries, you can be sure that your property winds up in the right hands.
