Who to name as a beneficiary on your Life Insurance policy?
Firstly, we would like to congratulate you! You have taken the right decision of purchasing a life insurance policy to protect your loved ones.
Every life insurance policy requires you to name a beneficiary. The beneficiary is the person or people receiving your life insurance payout after your death; it could also be a trust, a charity or your estate.
You are also free to name more than one beneficiary. You can also decide the percentage of money to go to each – like, you can name 60% to a spouse and 40% to an adult child. It depends entirely on you.
You will usually be asked to choose two types of beneficiaries: a primary and a secondary. The secondary beneficiary receives the payout only if the primary beneficiary has deceased.
Taking care of children
One of the main reasons people buy life insurance is to provide for the needs of children left behind. This is usually done by making the surviving spouse (the one taking care of the children) a beneficiary. But what if both you and your partner die at the same time (God forbid!)?
First of all, be aware that it is not a good idea to name a minor as a beneficiary. This is because the law prohibits paying life insurance to anyone under the age of majority, which is 18 to 21 depending on your state. If a kid were to be named, the case would be moved to probate. The court will appoint a guardian who will watch over the money/estate until the child comes of age.
Fortunately, there are two options. The first is to appoint an adult guardian. The guardian can be someone you can trust with money for key things like health, housing, as well as education until the kid becomes a legal adult. At this point, all the remaining amount of money has to be returned to the child and s/he can spend it according to his/her wishes.
The second option is to work with a lawyer to create a trust. In this scenario, the trust is the beneficiary and a trustee is appointed to manage and distribute the funds. The main advantage of a trust over appointing a custodian is that it has more control.
A trust allows you to specify how you want the money to be distributed, and it allows you to do so even when your children are adults.
Have a cause close to your heart? If you have one, you might consider naming a charity as the beneficiary of your life insurance.
There are many ways to do this. You may name the charity as the beneficiary of an existing or a new policy, consider making the charity the owner as well as the beneficiary of the policy, add a rider to your life insurance policy for a charitable payout, etc.
Tips to name your beneficiary
Always be careful when naming your estate as a beneficiary. Because this can result in a legal hassle (called probate) that can be both tiresome and costly. The best thing to do is to be specific and mention certain individuals or organizations as your beneficiaries.
Also consider the following things as strictly as possible while naming a beneficiary.
- Be specific. Use names instead of writing things “my children” or “my wife” as beneficiaries. This can save a lot of time, since the insurance company does not have to search for information.
- Always name a secondary beneficiary. Death and abandonment of life insurance without a living beneficiary could mean that the payment will go to someone you never wanted to benefit from under your policy. A lengthy legal process also comes into the picture to sort things out.
- Choose trustworthy custodians and trustees. Really think about who you would trust for your child’s financial well-being in your absence. Your kids may love their uncle or aunt, but are they mature enough? Otherwise, choose someone else who is.
- Review your beneficiaries regularly. It’s always a good and healthy practice to review your beneficiary names at least once a year, especially after important life events like marriage or divorce, child-birth, or death.
- Let your beneficiaries know of your wishes. Communication is a good thing. Make sure your beneficiaries know what you intend to do and how to find your policy.
Looking for a life insurance policy in Brampton or Mississauga? Get in touch with our experienced financial advisors.