Choosing your life insurance beneficiary is an important step in securing a life insurance policy and likely one of the main reasons you bought your policy in the first place. Your life insurance beneficiary is the person or entity who will receive your policy’s death benefit when you pass away. Life changes, legal requirements and terms of your policy can all play a role in selecting your beneficiary. There’s much to consider and it’s a big decision to make, so here are seven tips to help you select your life insurance policy beneficiary.
7 Tips to Choosing a Life Insurance Beneficiary
Understand Who Can Be a Life Insurance Beneficiary
Almost anyone can be a beneficiary—people, organizations, trusts—and oftentimes life insurance policies give you the option to name multiple beneficiaries. Take the time to write down all of the potential parties before deciding who to name as your beneficiary.
Who You Can’t List as Beneficiary
While almost anyone can be a beneficiary, there are a few beneficiaries you’ll want to avoid.
- Disabled people
- Your spouse in certain cases Estate
- Pets are also not allowed to be beneficiaries
When naming your beneficiaries, you’ll want to include as much information as possible to make sure it’s easy for them to receive the payout. For example, listing “my children” as your beneficiary may cause confusion during the payout, whether it’s the amount of money given to each child or if one of them happens to die before you do. Being specific can help ensure that your money ends up where you intended.
Have a Contingency Plan
Having a contingent beneficiary is important in the case your primary beneficiary is unable to receive the payout. If your primary beneficiary can’t be located, is deceased at the time of your death or refuses the proceeds, your contingent beneficiary becomes the recipient.
Review Your Life Insurance Beneficiary Designation Often
It’s important to review your life insurance beneficiaries every couple of years, especially following major life changes. Whether you get married, divorced or have a child, failing to update your beneficiaries can cause issues with your policy payout when the time comes.
Consider Your Life Insurance Beneficiary’s Circumstances
The circumstances of your beneficiary are important to consider to avoid potential complications for both the payout and the beneficiary. For example, naming a minor as a primary beneficiary can potentially cause issues, as insurers won’t typically pay the life insurance benefits to minors. If there is no trust or designated guardian, there can be a significant delay in providing financial support to the children. If your beneficiary is a lifelong dependent, such as a child with special needs, the life insurance benefits can put that individual at risk of losing their government assistance. To avoid this, you can set up a trust and name the trust as a beneficiary, which will avoid the risk of them losing the support they need.
Make Sure Your Will Aligns With Your Life Insurance Policy
A common mistake people can make is designating a beneficiary for their life insurance policy in their will, but not in the actual contract of their policy. Who you designate in your policy as the beneficiary is where the money will go, even if you designated someone else in your will.
Consider Tax Implications of Your Life Insurance Policy
More often than not, a life insurance payout is not considered taxable income. There are situations, however, where the beneficiary may have to pay taxes. If you designate the payout to be held by the insurance company for a certain period of time, the beneficiary may have to pay taxes on the interest accrued during that period. Designating your estate as the beneficiary can increase your estate’s value, which can also leave it subject to higher estate taxes. Making sure you understand who, how and when your policy is paid out can help avoid various tax implications.
Make Sure Your Beneficiary is Covered with the Right Life Insurance Policy
Buying life insurance is an important step in protecting your loved ones’ financial future. To get started on figuring out how much life insurance you need, try our life insurance calculator. By working with SelectQuote, we can make sure you have the coverage you need at a price you can afford and with a carrier you can trust.