7 things to consider when choosing your life insurance beneficiary

In life, there are few decisions as important as choosing the beneficiary of your life insurance proceeds.

Naming a beneficiary can help protect your loved ones, bypass legal processes or red tape, and ensure that the funds go where you intended upon your passing.

Here are the most important things to keep in mind when choosing your beneficiary to ensure the process goes smoothly.

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1. Beneficiary Options

There are many options when choosing a beneficiary – the proceeds don’t always go to the spouse or children. Your beneficiary can be one person or two or more individuals.

You can also name the designated trustee of your estate, a business partner, or a charity organization. Alternatively, the funds can go directly into your estate.

The reason you purchased life insurance will influence your choice of beneficiary.

2. Insurable Interest

There must be insurable interest between you and the person or entity you name as your beneficiary. Although you can technically name anyone as your beneficiary, there needs to be legitimate financial interest and purpose between all parties.

For instance, spouses usually name their children and other dependents as beneficiaries because these are the people who typically rely on the insured for financial support.

3. Money Management

Consider if the beneficiary you name can manage money effectively. If not, you can establish a trust and appoint a trustee to distribute or invest the funds on the beneficiary’s behalf.

4. Contingency

Always name a secondary beneficiary on your policy as a backup in case the primary beneficiary refuses the proceeds, can’t be found, or is deceased at the time of your passing.

Having a secondary beneficiary (also known as a contingent beneficiary) will ensure that the funds are passed on without probate.

However, make sure you select the secondary beneficiary according to the same selection process you employed for the primary beneficiary – not just as an afterthought.

5. Age of the Beneficiary

Pension plans, retirement accounts, and insurance plans will not usually pay benefits to someone under the age of 18, and state regulations also may limit the amount of the proceeds a minor can receive.

In the case of the latter, the court may have to appoint a guardian – which can be an extremely lengthy process. Setting up a trust fund for a minor and appointing a trustee to handle the account until he or she reaches a certain age may be a better option. 

6. State or Policy Rules

Some insurance companies or states may restrict who you may name as your beneficiary. In states with common property laws, your spouse may need to sign a waiver if you name another beneficiary.

Consult state guidelines and discuss these matters with an attorney if you have any questions about state laws and life insurance beneficiaries.

It’s also important to note that your will does not override your life insurance policy – so always make sure that they corroborate each other. Both life insurance beneficiaries and wills can be contested in a court of law.

7. Estate as a Beneficiary

If you fail to name a beneficiary, your life insurance proceeds will automatically go to your estate. The probate court will decide how to distribute the funds, which can be a long process that could whittle away at the proceeds.

To make sure that your life insurance proceeds are paid over to the people who need it quickly, designate a beneficiary as soon as possible.

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