When purchasing life insurance, the most important question to ask yourself is, “Who would financially suffer if I suddenly passed away?” In other words, who relies on you for an income or financial support?
A life insurance beneficiary is either a person or entity that receives the funds from a life insurance policy when the insured passes away. Life insurance is usually purchased with this person or entity in mind.
But what if my beneficiaries are children, or what if I need to protect more than one person?
We’ve created this extensive guide to help you select a beneficiary or beneficiaries for your life insurance policy.
Below are the 5 most common questions our potential clients have when purchasing a life insurance policy:
Quick Article Guide:
1. How Do I Decide Whom to Name as the Beneficiary of My Life Insurance?
2. Can I List More Than One Beneficiary on My Life Insurance Policy?
3. If I Have Young Children, Whom Should I Name As My Contingent or Secondary Beneficiary?
4. Determining How Your Beneficiary Is Paid
5. How Do the Life Insurance Companies Make Sure the Right Beneficiary Is Paid?
In life insurance, the beneficiary is the person(s) or entity that will receive the money from your life insurance policy when you pass away. The money paid out by a life insurance policy is often referred to as the “death benefit” or “face amount” of your life insurance policy.
A beneficiary can be one person or multiple people. Most commonly, our clients will name their spouse or an immediate family member as their policy’s beneficiary. However, you do not have to name a family member as the beneficiary of your life insurance policy. Your life insurance policy’s beneficiary can also be a charity, a trust (in which a trustee will be designated to administer the benefits), a business, or your estate.
90% of the time, our clients list their spouse as the beneficiary of their policy. If you pass away, your spouse will receive the proceeds of your life insurance policy and they are free to use this money as needed. The proceeds from a life insurance policy are usually used to pay off a mortgage, replace an income, or to pay off outstanding debts and medical bills.
If you are not married, we usually recommend naming an immediate family member as the beneficiary of your life insurance policy. There are a few questions that you should ask yourself to make sure that the proceeds of your life insurance are allocated correctly and used as you intended.
• Who is financially reliant on your income?
• Who will be taking care of your funeral and final expenses?
• Who will take custody of your children if you pass away before they are adults?
• Are you leaving any debts behind?
Selecting the number of beneficiaries for your life insurance policy depends on the reason you are purchasing the coverage. We’ve broken down the five most common reasons that people buy life insurance and explained the most appropriate beneficiary for each situation below.
Life Insurance for Your Family:
If you are purchasing life insurance to protect your family, most life insurance policies allow you to name as many beneficiaries as you want. However, life insurance policies purchased for family protection are set up in a very specific way. Typically, each spouse will name each other as their beneficiary. This means that if either parent passes away, the other parent has money to pay bills and carry on; this is also known as income replacement.
In this situation, each parent will usually name their children as a backup beneficiary if both parents pass away unexpectedly. To learn more about listing your children as a backup beneficiary on your policy, please also read the section of this article about setting up your backup or contingent beneficiaries.
Life Insurance for Business Needs:
If you are purchasing life insurance to protect your business, you’ll need to name your business partners, your business, or your bank as the beneficiary. In most situations, life insurance that is purchased for a business only has one beneficiary.
• Buy/Sell Agreements
Buy/Sell agreements are created by business owners as a way of buying out the other partner’s share of the business if they were to pass away. The proceeds of the life insurance policy are paid to the deceased owner’s family to prevent the business from being forced to sell off assets or liquidate. If you are setting up a buy-sell agreement, you’ll want to name your business partner or your business as the beneficiary. To learn more about creating a buy-sell agreement to protect your business, see our article “Setting Up a Buy-Sell Life Insurance Agreement to Protect Your Business: 4 Easy Steps”.
• Key Person Life Insurance
Key person life insurance is purchased by a business to protect the business from the loss of an owner or “key” business executive. These policies are purchased by the business, and the business is listed as the only beneficiary of the policy. If a key executive or owner passes away, the death benefit from their life insurance policy will provide the business with the funding it needs to recruit, hire, and train a replacement. To learn more about key person life insurance, please see our article, “Buying Life Insurance for a Key Employee: 4 Easy Steps to Business Protection Insurance”.
• SBA Loans
Before approving a small business loan, the lender or bank will often require the loan recipient to purchase life insurance. In this situation, the lender or bank is listed as the beneficiary of the life insurance policy for the duration of the loan. These policies are set up to protect the lender if the loan recipient passes away before the loan is paid back. When life insurance is purchased for an SBA loan, typically only one beneficiary is listed on the life insurance policy, the lender. As the loan is paid back, the amount of life insurance that exceeds the amount of the loan can be assigned to another individual through a collateral assignment. To learn more about SBA loans and life insurance, read our article, “4 Easy Steps to Purchasing Life Insurance for a SBA Loan or other Business Loan”.
Life Insurance to Protect Your Estate:
When life insurance is purchased for estate protection, there is only one beneficiary listed on the policy, a trust. If your estate or total assets are valued at more than $5,490,000, or the current estate tax exemption, a life insurance policy can protect your estate from estate taxes. In this situation, an irrevocable life insurance trust is created to serve as the owner and the beneficiary of the life insurance policy, keeping its death benefit separate from the estate. To learn more about using life insurance to protect your estate, please see our article, “Estate Planning with Life Insurance – Insider’s Tips & Advice”.
Life Insurance to Leave an Inheritance:
Life insurance is commonly purchased to leave an inheritance behind for children or grandchildren. When purchasing life insurance for an inheritance, the policy owner will usually divide benefits of the policy between their surviving children or grandchildren. In this situation, it is common to have multiple beneficiaries listed on your policy and you can list each beneficiary for different amounts. As an example, some of our clients leave 20% of their policy to their children and 10% of the policy to their grandchildren. To learn more about leaving an inheritance with life insurance, please see our article, “Purchasing Life Insurance to Leave an Inheritance”.
Life Insurance to Pay for Final Expenses:
When life insurance is purchased to pay for final expenses or burial costs, the number of beneficiaries listed on the insurance policy tends to vary. Some of our clients will only list one beneficiary that they feel is the most responsible while others will name all of their surviving children. When selecting a beneficiary for your life insurance for final expenses, make sure your beneficiary or beneficiaries have a copy of your life insurance policy.
When purchasing a life insurance policy, you also want to consider who to name as either a contingent or a secondary beneficiary in the event that something happens to you and your primary beneficiary, or if you outlive your primary beneficiary. You also have the right to change the beneficiary listed on your policy at any time, if needed.
We always stress the need to take care of these details beforehand because if no one is listed, the proceeds of your policy will not become payable to your estate. Instead, your estate will go into probate. Probate is a process in which the courts decide how your funds, assets, and property are distributed. This is a very lengthy process and it can severely diminish or even deplete any benefits that would have been available to your loved ones, especially if there is a dispute between your surviving family members.
To avoid this scenario, most of our clients will name their children as the contingent, or secondary, beneficiaries on their life insurance policy. However, if your children are under the age of 18 (this may vary by state), the insurance companies will not pay out to minors. To control how the proceeds of your life insurance policy are paid out, you will need to appoint a guardian to take care of your children or create a trust.
Most of our clients will choose a close relative, or someone that they can trust with their children’s future. By naming a guardian, trust, or trustee to invest and manage the proceeds, you can make sure that your children are taken care of when you’re no longer around.
In most cases, the insured will name their spouse as the beneficiary of their life insurance policy. If the insured’s passes away, their spouse will usually the policy’s entire death benefit as a tax-free, lump-sum. However, some of our clients are concerned that their spouse may struggle to handle the finances after their gone.
Receiving a large sum of cash at once, especially at a time of great loss, can cause concern for some of our clients. If this is a concern for you, not to worry, you will have options for setting up the payout of your life insurance benefits when you purchase your policy.
The easiest way to control the payout of your life insurance is to set up the cash benefit as an annuity rather than a lump sum. In this situation, the life insurance company would pay the benefits of the policy out over time rather than all at once. Another option is to set up a trust with a trustee (who is usually a legal entity rather than a person) that can manage, invest, and distribute the funds as appropriate.
Once you decide who you want to name as your beneficiaries, it’s important to give your insurance agent their full names and social security numbers. This information allows the life insurance company to accurately identify your beneficiaries and locate them before paying a death benefit. By giving the insurance company specific information about your beneficiaries, you will make sure that the money goes to where it’s supposed to if you are not around.
The final step that a lot of clients don’t necessarily think about is specifying how you want the money distributed. You can divide money equally among your beneficiaries, assign a set percentage for each beneficiary, or leave all of the proceeds to one beneficiary. Remember, you can always change these percentages down the line if you need to.
We’re Here to Help!
There are a lot of details to think about when purchasing a life insurance policy, but don’t worry, we’re here to make it easy and walk you through every step! Give one of our agents a call and we would be happy to assist you through the process. Our agency represents more than 60 top-rated life insurance companies to make sure our clients always get the best deal on their policy.
As an owner-operated agency, our agents do not have lofty sales quotas to meet. We provide our potential clients with a consultative approach to life insurance. Our primary goal is to make sure that we provide the best service and products available at the most affordable prices. Give us a call today at: 855-902-6494 or request a free instant quote online to compare rates from dozens of companies in less than a minute.