Unfortunately, there are thousands of families every year struggling to get their resources because of beneficiary mistakes.
Although it is something not extremely fun or exciting to plan for, it is necessary to give thought to who your beneficiary will be in the event of your death.
Even if you have put extensive thought and planning into your life insurance plan, it may be the case that you did not put as much thought into who would gain the proceeds of your life insurance policy.
The fact of the matter is that both the selection process as well as the maintenance of your policy are equally important when it comes to when you should get life insurance.
Choosing Your Beneficiary
When writing out who will receive life insurance benefits upon your death, simply putting one-word designations like “spouse,” “children,” or “grandchildren” isn’t enough anymore.
When choosing a life insurance beneficiary, it is very important to be clear in the designations of who is going to receive the benefits after the death of the insured.
Due to specifications regarding the wording of beneficiaries, certain members of the family may be left out, while others may be unintentionally included. For example, if you put “spouse,” then former spouses may be included in the event of a divorce.
In the case that children are the beneficiaries, then which children will be included must be specified. Are they only children from your marriage, or do children born out of wedlock count?
It becomes especially complicated when there is an ex-spouse involved, or adopted children. A specification is required if adopted children are included, or the children of a spouse which you may have adopted as well.
The same applies for any grandchildren. Also, if the children are minors, it is generally recommended that a guardian be appointed, as benefits aren’t usually paid to minors.
Depending on what state you live in there are a number of rules that you must adhere to when it comes to choosing a beneficiary.
It is also typically the case that if you are leaving your policy to a minor, they must have a guardian assigned to them at least until they are considered an adult.
Types of Beneficiaries
A beneficiary does not necessarily have to be an individual, though. It can also be your estate, or even an organization.
The most important part about choosing a beneficiary is being extremely specific about who you are designating. A lot of people will specify by providing a social security number or some other type of unique identifier in addition to a name.
The beneficiaries can be specific, or a class. Specific beneficiaries are identified by name and relationship to the insured, while a class is identified mainly by relationship, such as “children.”
If a class is chosen as a beneficiary, who belongs to that class needs to be clearly identified, as legal complications can arise if the class isn’t distinguished.
In the event that you want to name multiple beneficiaries, the same rules apply as if you were to only have one beneficiary.
You need to be specific in the name of the person, as well as have a unique identifier. Additionally, the percentage and description of who receives what portion of the payout is equally necessary.
Policies usually do not have a limit to the number of beneficiaries that you can claim.
Many people think that is only necessary to allocate based on round numbers as opposed to percentages, but this can lead to many problems if your policy grows in value during its life.
Changing Your Beneficiary
It is important to remember that if you do not keep your beneficiaries up to date, they will not be in the name of the person that you want the proceeds to go to. There are multiple life events that can change the status or identity of your beneficiaries.
It is extremely easy to change your beneficiaries; the hard part is remembering to do so. This is one of the most common mistakes that policyholders make in regards to their life insurance.
They name their beneficiary and then never think about it again, which can cause a whole avalanche of problems if they pass away.
There are, however, two types of beneficiaries: one of which is flexible in nature, whereas the other is not. The first type is called a revocable beneficiary. This means that the beneficiary of the policy can be changed whenever the policyholder chooses.
An irrevocable beneficiary, on the other hand, requires the sign off of the beneficiary in order to change who receives the proceeds of the policy.
This can prove difficult if the beneficiary is not acting in your best interest, or if they are not on the same page as the policyholder. As you can see, there are distinct differences between the two types of beneficiaries.
You should be very careful in choosing which type your policy has, since it could make a significant difference in the future. In just about every case, it makes more sense to go with a revocable beneficiary that allows you to change the beneficiary at any time.
This will give you more freedom in case there are any problems with the beneficiary, or if you need to change who will receive the money.
It is advisable to have several levels of contingencies. In the event that your beneficiary dies or is in some other way incapable of receiving your proceeds, there is a contingent beneficiary that is also named.
If the contingency dies as well as the beneficiary, the benefits may be left in limbo, or to be disputed by other family members.
That is why several contingencies must be clearly identified, as many complications can arise considering the possibilities of a changing family structure.
This can apply in most cases to spouses where the policyholder and the beneficiary are similar in age and could potentially die from natural causes around the same time.
In the case that you do not have a contingent beneficiary named, the proceeds will become a part of your estate. This should be avoided at all costs, as it is usually the case that the estate will be taxed heavily.
It’s always best to have a detailed plan in place regarding who would get the money if something were to happen to the beneficiary. You don’t want your life insurance policy to go to waste or be much less effective than you planned.
How Much Life Insurance Will Your Beneficiaries Need?
As important as it is to find your right beneficiary, you have to make sure that person(s) is left with enough money to cover any financial obligations you will leave behind. So, let’s take a look at some of the factors that help you decide how much coverage you need to buy.
You always need to calculate your current debt situation first.
The main goal of your life insurance plan is to give your family the money needed to pay off all your bills and debts. The number you come up with should be the baseline for how much coverage you start looking for.
If it’s in your budget, we also suggest adding a few years worth of salary to the final total as well. Your income has helped support the family for years, and a sudden loss could bring on major lifestyle changes.
To stave that quick change, it’s best to up the value some to provide breathing room as family members cope with a drop in household income.
Another category to account for is the funeral expenses. While you may not realize it, funerals are expensive.
Funerals can come in around $10,000, and are a big expense that some might not be ready to pay. Your coverage will give your family the money they need to fulfill your family wishes.
Obtaining Affordable Life Insurance
In addition to choosing the right beneficiary, and ensuring that they will have enough money, it’s also important to get the most affordable life insurance plan available.
A lot of applicants are surprised to see how cheap a life insurance plan can be, regardless of how much life insurance you need. The following tips can help applicants obtain the most affordable life insurance plan for themselves and their loved ones:
- Cutting Tobacco: One of the easiest ways to get lower insurance rates is by cutting out tobacco. Users posing a much greater risk for health problems, such as cancer or heart problems, could equal a greater risk to the insurance company. By mitigating that risk they’ll be charging you much more for your insurance coverage, and that charge could be twice the quoted amount.
- Getting in Shape: The medical exam you’ll complete is going to show the carrier a snapshot of your overall health. If you’re overweight, then your premiums are going to be around 50% higher than a person who rates healthy. When you know the date you want to apply for life insurance, it’s best to start living a healthier life a few months beforehand. Eat a little cleaner, and exercise a little more. These actions will keep your premiums down.
- Laying Off the Gas Pedal: When the insurance company reviews your application, they are going to pull your driving records. With a lengthy accident or a ticket history, the carrier could see you as a high-risk applicant, which would translate into more expensive coverage. Slowing down on your way to work in the morning can save you hundreds of dollars every year, not to mention you won’t have to pay those expensive speeding tickets.
- Taking Time to Compare: Our last tip is the easiest step for you: compare, compare, compare. You can make it even easier by working with us!
We have years of experience working with quality insurance companies and we’ve helped all types of applicants get the perfect plan. Our status as independent agents allows us to gather as many quotes as fast as possible and present them to you in a simple form.
In most cases, there is a person or some other factor that is the catalyst for taking out a life insurance policy at all.
It is for this reason that choosing a beneficiary when it comes to buying affordable life insurance is typically a pretty painless task. There are some snags that one can face when choosing a beneficiary, though.
Your estate as the beneficiary may seem like a good idea, but it never is. Not only is your estate liable to be seized by creditors, but your estate is also heavily taxed.
If you are concerned that your estate may not be covered in regards to expenses. there are other ways to protect it other than leaving your estate as the beneficiary.
If you want to avoid this you can still name a person as a beneficiary, but also put it in writing that you want the proceeds to first be used for settling your estate.
This is one of the best ways to ensure your estate is covered after your passing without having the life insurance policy eaten alive by taxes.
A lot of policyholders don’t put a lot of thought into who they name, or they never go back and fix the beneficiary named. Also, don’t use vague wording that may include or leave out people you don’t wish to. This can lead to a lot of complicated problems in the future.
The Bottom Line
When deciding on life insurance beneficiaries, it is best to consider all possible situations.
While it may become complex and it is grim to think of the future deaths of you or family members, all of these things do happen.
Save your possible beneficiaries the trouble of having to dispute the distribution of benefits by defining beneficiaries as specifically as possible.
Aside from naming a beneficiary correctly, it’s vital that you also have enough life insurance coverage for your family.
Having too little insurance could leave them with thousands of dollars in leftover debt. Try speaking with a life insurance advisor to determine how to properly designate your beneficiaries.