Once you’ve secured your life insurance coverage, one of the most important steps to take is naming your beneficiary. In the life insurance world, a beneficiary is the one who receives the payout from the life insurance policy when the insured passes away. Depending on the type of life insurance policy, the payout (also referred to as the “death benefit”) can be directed specifically towards end-of-life expenses such as the funeral and burial or towards outstanding debts, mortgage payments, and income replacement.
For many new policyholders, the question of who to name as a beneficiary can be a difficult one. You may not be sure who should receive the payout. You may be young and healthy, and your death seems like a very far-off concept. Let us help you understand what you should consider when making this decision.
As you think about naming your beneficiary, consider:
- Your family situation. It’s impossible to make a universal statement about who your beneficiary should be, because every situation is unique. Think about your family members and loved ones and consider how they would be affected by your death. Would they be responsible for your funeral? Did they co-sign any payments with you? Would they take on any outstanding debts? Are you supporting them or sharing finances with them? Would they be able to support the household without your income?
- Your financial obligations. As mentioned above, there are a number of different ways in which your death can financially affect your loved ones. Be mindful and think of all of the possible obligations. It is certainly possible to select multiple primary beneficiaries and divide the death benefit up between them. However, you shouldn’t only select primary beneficiaries, you should also consider naming contingent beneficiaries.
- Contingent beneficiaries. These are beneficiaries who would receive the death benefit if the primary beneficiary were no longer able to. Though it may be unlikely, your primary beneficiary may die before you. That’s why it’s important to ensure that you name a contingent beneficiary to receive the benefit and provide for your loved ones.
- Setting up a trust. If you’re planning on giving your life insurance proceeds to your children, you may want to consider establishing a trust that will provide them with funds for college or the rest of their lives, rather than overwhelming them with a large windfall before they may be financially independent.
As you select your beneficiaries, make sure to avoid the following errors:
- Not being specific. Selecting a beneficiary can be a difficult decision, particularly if you are young or have few or no financial obligations. However, this does not mean that you should send the death benefit to your estate. Family members will receive the death benefit immediately, but a benefit sent to your estate may have to go through probate and will not be available quickly. In addition, vague wording could mean trouble. “Spouse of the insured” could mean your current spouse, or it could mean your ex-spouse should you get divorced. “Children” could exclude children born after setting up your beneficiaries. To be safe, provide your beneficiary’s full name as well as identifiable information like their address, date of birth, and Social Security Number.
- Not updating your beneficiaries. There’s always time to update your insurance policy, and your beneficiaries are part of that equation. Every few years, as you review your coverage, take an additional look at your named beneficiaries. Is there anyone missing from your list? Should any of them be changed? Make the changes now, before it comes time to provide them the payment.
- Naming a minor. You can indeed purchase life insurance for a young child, but life insurers legally cannot pay a death benefit directly to a minor. You can still leave a legacy for your child; you will just need to set up a trust, name an adult custodian or leave the money to a reliable adult.
- Not informing your beneficiaries. This is more common than you may think. Sometimes people put off informing their beneficiaries. Before naming someone your beneficiary, make sure to thoroughly discuss it with them and answer any questions that they may have.
We know that choosing a beneficiary can be a difficult decision to make. If you are still unsure about how to choose or update your beneficiary, contact your life insurance agent today. They would be happy to take the time to further explain beneficiaries to you and help you with your decision.
About National Catholic Society of Foresters
At National Catholic Society of Foresters, we pride ourselves on giving back to the communities that we serve by providing quality and comprehensive insurance solutions. Sales from our financial services products help fund member benefits along with social, educational, and volunteer programs designed to respond to community needs. Our portfolio is extensive, ranging from various life insurance policies to IRA’s to support your financial needs no matter what stage of life you’re in. For more information, contact our friendly experts today at (855) 804-7424.