Choosing the Beneficiaries for Life Insurance

When you purchase a life insurance policy for yourself or a family member, there are a number of important decisions to be made. Deciding what company to choose, how much cover to purchase and what type of policy you need are all vital. But once you’ve determined each of these factors, there is still one more important decision to make. Who will be the beneficiary of the policy?

The beneficiary is the person who receives the payout from the policy when you die. To avoid any legal problems, insurance companies generally require policyholders to designate a beneficiary, in writing, when they purchase the policy. While choosing a beneficiary might seem like a simple matter, there are some important things to consider before you write a name on your insurance application.

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Family First?

If you are purchasing a life insurance policy on yourself or your spouse, chances are you will list the other person as the beneficiary of the policy. But there are cases in which the spouse might not be the most obvious choice.

Because policyholders can divide the proceeds among several beneficiaries, they may wish to divvy up the policy between their spouse, children or other family members or friends. For example, some people list their children as the policy beneficiaries. In the case of very young children, the beneficiary might be a trust that will hold the money until the children reach a certain age.

In some cases, the insurer or the policy may stipulate that the proceeds automatically go to the holder’s spouse, unless the spouse signs a document granting permission for someone else to be listed as the beneficiary. These rules prevent unpleasant surprises, such as a wife discovering that her deceased husband left his life insurance to a mistress or a charity organization without telling her.

Other Options

While family members are usually the most obvious beneficiary choice, in some cases you may wish to give the proceeds of your life insurance to another entity, such as a charity. You can also list your estate as the beneficiary on the policy. In that case, when you pass, the life insurance proceeds are then distributed as determined by your will.

Important Considerations

Regardless of who you select as your beneficiary, the most important thing is to be specific, and list the beneficiary by name. Simply writing “spouse” or “husband” or “wife” on the form could create problems down the road. If you divorce and remarry before updating your policy, the proceeds could end up going to your ex instead of your current spouse.

The same principle applies to your children. If you just list “children” on your application, only the children you had when you purchased the policy will receive benefits. Thus, it’s important to list your children by name and keep your records updated.

In fact, you can easily change beneficiaries at any time. In most cases all you need to do is fill out a new beneficiary designation form and return it to the insurer. Remember that beneficiaries do not automatically change along with your life circumstances. If you get divorced, you must legally change the beneficiary designation unless the terms of the divorce prevent you from doing so.

Designating who will receive the proceeds from your life insurance policy is an important decision. If you don’t name someone, the money will either go to your estate or be given to someone based on a legal order — someone who you don’t necessarily want to receive the money. It’s extremely important to take the time to think about who will get the money and take the legal steps to ensure it gets to the right person.

About the Author: Carson Sebastian is a financial writer who covers insurance, estate planning and retirement issues for a number of magazines and blogs. A former insurance professional.