The beneficiary(ies) of your life insurance policy is the person who will receive the proceeds of the policy’s death benefit upon your passing. You chose this person(s) when you first bought your policy and probably haven’t thought about it since. Do you even know who your beneficiary is? Do you have a contingent beneficiary? Do you have multiple policies and are the beneficiaries the same?
Twenty years is a long time. A lot can happen during the term of a life insurance policy. Life changes quickly, often unexpectedly. These changes, no matter how small they seem, could have a large impact on your life insurance. Whether it is your needs that change or your beneficiary designation that gets altered, reviewing your policy in its entirety is an important part of maintaining a proper portfolio.
At the death of an insured, life insurance companies follow the terms of the policy. It is important to know that the instructions for your estate that are determined in your will do not pertain to your life insurance and it is the named beneficiary on the policy that will be the recipient of the death benefit. Keeping your beneficiary designation current is key to ensuring your life insurance benefits are paid as you desire.
You assigned your beneficiary when you purchased the policy and, unless you changed it with the carrier, that person is still set to inherit the money, even if you divorced them. There are several other life events that could trigger a beneficiary change; marriage, birth of children/grandchildren, or the death of the designated beneficiary.
WHAT IS A CONTINGENT BENEFICIARY?
The contingent beneficiary(ies) is the back-up recipient in case the primary beneficiary pre-deceases or dies alongside of you. A contingent beneficiary is your “Plan B”, your extra guarantee that your wishes are followed in your death. This is a designation that is often overlooked.
It may seem obvious that you want your children to get the money if your spouse is no longer alive. However, if you do not have contingent beneficiaries documented within the policy, the death benefit proceeds become payable to the insured’s estate. Once it is designated to the estate it could be subject to estate taxes and/or be held up in probate and cause a delay in the disbursing of funds.
CAN MY CHILDREN BE THE BENEFICIARIES?
Because it is common to assign your children as beneficiaries, it is very important to understand that life insurance companies won't pay the proceeds directly to minors. Instead, the court will go through the costly process of appointing a guardian to handle the proceeds until the child reaches 18 or 21. So, unless your children are adults, you will not want to list them as direct beneficiaries. As an alternative, you can leave the money for the child's benefit to a reliable adult; set up a trust to benefit the child and name the trust as the beneficiary of the policy; or, name an adult custodian for the life insurance proceeds under the Uniform Transfers to Minor Act. Similarly, if you have a lifelong dependent that you want to assign as a beneficiary, such as a child with special needs, just like you should with a minor child you would want to set up a trust on behalf of that dependent and delegate the trust as the beneficiary. By doing so, you are ensuring that they receive the funds and are still protecting their eligibility for government assistance in the future. Please consult an attorney for further detail.
Life insurance is your PS: I love you to your family. It is the security you get while living to know you are taking care of them in your death. Protect yourself and protect them by reviewing your policy and your beneficiary(ies) every few years and have the peace of mind in knowing the correct people will be financially protected.