First off, great job on buying life insurance! You took an important step by protecting the ones you love.
Every life insurance policy requires you to name a beneficiary. A life insurance beneficiary is typically the person or people who get the payout on your life insurance policy after you die; it may also be a trust, charity or your estate.
You can also name more than one beneficiary, as well as the percentage of the payout you want to go to each one—for instance, you could designate 50% to a spouse and 50% to an adult child.
You’ll typically be asked to pick two kinds of beneficiaries: a primary and a secondary. The secondary beneficiary (also called a “contingent beneficiary”) receives the payout if the primary beneficiary is deceased.
Providing for Kids
A big reason why people buy life insurance is to provide for children left behind. Usually this is done by making the surviving spouse or partner who cares for and is raising the kids the beneficiary. But what if you’re widowed or—God forbid—-both you and your partner pass away at the same time?
First, know that it’s not a good idea to name a minor as a beneficiary. That’s because the law forbids life insurance payouts to anyone who has not reached the age of majority, which is 18 to 21 depending on your state. If a child were to be named, then it would be turned over to probate court. The court will name a guardian who has oversight of the money/estate until the child comes of age.
Fortunately, there are two options. The first is to name an adult custodian. The custodian should be someone you can trust to use the money for things like housing, health care, and education until the child reaches the age of majority. At that point, any remaining money gets turned over the child and they can spend it any way they want.
The second option is to work with an attorney to set up a trust. In this scenario, the trust is the beneficiary and a trustee is named to manage and distribute the funds. The main advantage of a trust over naming a custodian is having more control.
A trust lets you specify how you want the money distributed—and it lets you do so even when your kids are adults. (One quick word of caution: Definitely consult with an attorney if you’re setting up a trust for a special needs child. They can help you create one that doesn’t impact your child’s eligibility for government assistance like Medicaid or Supplemental Security Income.)
Naming a Charity
Do you have a cause that’s near and dear to your heart? If so, you might consider naming a charitable organization as the beneficiary of your life insurance.
There are several ways to do this. They include naming the charity as a beneficiary on a new or existing life insurance policy, making the charity both the owner and the beneficiary of a life insurance policy, adding a charitable-giving rider to a life insurance policy, or working with a community foundation to figure out the best way to distribute a payout.
Final Tips
Think carefully about naming your estate as a beneficiary. This can trigger a long and costly legal process known as probate. A faster and more efficient solution is to name specific individuals or organizations as beneficiaries.
1. Get specific. Instead of naming “my spouse” or “my children” as beneficiaries, list their names along with their addresses and Social Security numbers. This saves a lot of time since the insurance company doesn’t have to track down information.
2. Always name a contingent beneficiary. Passing away and leaving behind life insurance without a living beneficiary could mean the payout goes to someone you never wanted your policy to benefit. It could also require a court-appointed administrator to sort things out.
3. Pick trustworthy custodians and trustees. Really consider who’d you trust your child’s financial well-being with if you weren’t in the picture. Your kids may love their uncle or aunt, but is he or she mature and responsible with money? If not, pick someone else who is.
4. Regularly review your beneficiaries. It’s a good idea to review your beneficiaries about once a year and after major life events like a marriage, divorce, the birth of a child, or a death in the family.
5. Communicate your wishes. Let your beneficiaries know your intentions and how to find the policy.
6. Be aware of special situations. There are some situations that could trigger a tax on the life insurance benefit—for instance, when the policyholder and the insured aren’t the same person. Likewise, things can get sticky if you live in a community property state and don’t name your spouse as a beneficiary. An insurance agent can give you life insurance advice on this and much more.
