5 things you must know before deciding who gets your life insurance money
No one likes to think about death, but unfortunately, unexpected tragedy can happen at any time—It‘s just a fact of life that we can’t ignore. The silver lining, however, is that your life insurance policy can be a critical and helpful asset for your loved ones when you’re gone. This is why it’s super important to designate your life insurance beneficiary. But, deciding who gets the payout may not be so simple, especially if you’re not married and you don’t have any children. Lucky for you, we’ve compiled some quick answers to some not-so-complicated questions on naming a life insurance beneficiary. So read on as we give you the low-down on all the info you need to know about what could potentially be your first big life decision.
In This Article
1. What is a beneficiary?
Ok, this one might be a little obvious, but since we’re in the business of leaving no stone unturned, we’re going to give you a high-level beneficiary definition. Basically, a beneficiary is the person who receives anything you own that you’d like to leave behind. As far as life insurance goes, a life insurance beneficiary is the person who receives the proceeds of your policy (usually a lump sum of money).
It’s as simple as that. So why is designating one important? Naming a legal beneficiary will prevent a time-consuming and costly process for those you leave behind. Trust us, you don’t want people contesting your life insurance beneficiary and trying to figure out who gets what on their own. To put it bluntly, without a beneficiary you’ll be opening a Pandora’s box of drama. So make sure you choose the right person. Your loved ones will be very grateful you did.
Also, remember, a beneficiary is someone who, on average, is going to get over $100,000 after you die—that’s a pretty big deal. But as awesome as that is, you should also consider how your funds might potentially negatively affect them. What if the person receiving this huge windfall of cash blows it all on one dangerous-to-their-health night out in Vegas? You don’t want that. You want your loved ones to get a steady check each month so that they’re taken care of. So make sure you structure your policy to achieve the financial goals you have for your beneficiary. Some insurance companies allow for death benefits to be paid out in installments while also outlining acceptable uses.
2. Wait, what’s the difference between a trustee and a beneficiary?
Before we answer this, let’s just get another definition out of the way: what is a trustee? The clue is in the name. A trustee is trusted to hold on to your funds until the beneficiary is able to reap the rewards. To put it simply, after you die, the trustee is in charge of making sure anything you owned goes to someone. If you had a house, they help make sure that your kids get to keep it. If you had a car, they may sell it to help pay off a debt you had. When in doubt, just associate the word “trusted” with trustee and “benefit” with beneficiary. Breaking down and being clued up on jargon will save you from costly mistakes (and a lot of boredom) in the long run. So have fun with it while also getting comfortable with the specific insurance terms.
3. Ok, so who should I name as my life insurance beneficiary?
This may also seem obvious, but it’s not as simple as it sounds. More than anything, you need to think about the people who depend on you financially and how they would fare if you died tomorrow. But don’t forget, those who depend on you might not be those who are in your immediate family. If you’re married and have a spouse, then the answer is pretty obvious. The same goes for if you have kids, because, of course, they depend on you financially. If none of these scenarios apply to you and you don’t have the option of having your life insurance beneficiary as your spouse or child, then you need to think deeper.
NAMING A LIFE INSURANCE BENEFICIARY
If you’re not married, are you living with someone? For example, you may be wondering, “can I name my girlfriend as a beneficiary?” or even “can I leave everything to my cat”? The answer to both is yes (although, if you want to give your pet a luxurious lifestyle, you might have to do a little more research to make sure your life insurance covers furry friends). Also, did you know that your death benefit could help pay for your parents’ nursing home care down the line? It could also cover debts like outstanding credit card balances that might otherwise be passed on to a loved one. So, think about it. Because there’s no reason your love of shopping should come back to haunt your family once you’re gone. Start by writing down any debts and financial obligations you may have; this will help you narrow down who would be affected—financially—once you’re no longer around. Overall, you can name a parent, spouse, child, friend, organization, charity, or trust as a beneficiary. You can also name multiple beneficiaries if you want to spread the love.
4. Who should I never name as a beneficiary?
The whole point of a life insurance policy is to protect the people you love; those that will be impacted by your death the most. So choosing the wrong person to receive your funds makes the whole process redundant, and you’ve basically spent years paying for a policy that won’t even protect those you want it to. So, the question is, who should you never name as a beneficiary? First of all, make sure you actually do name someone. Failing to name anyone can be a good way to make sure your death benefit never sees the light of day. Also, we touched upon pets earlier, but we’d advise not listing your actual pet as a life insurance beneficiary. Because let’s be honest, where would that money go?
Additionally, it’s usually not a good idea to name your estate as a beneficiary (even if you’ve listed loved ones as beneficiaries also). If you do, your funds will have to go through a process called probate, which is the court process of wrapping up your estate. Unfortunately, your funds can’t be touched while they’re in probate—this is one of many reasons why the whole process is frustrating and best avoided. There are obviously a few more dos and don’ts when it comes to choosing a life insurance beneficiary. But we’ll leave you to do your own in-depth research. What we will say is just to be careful what you list in that “designation of beneficiary” section (and please, don’t leave it empty). In some cases, you might end up diverting important funds away from your loved ones, and that’s not a good look, dead or alive.
5. And finally, how often should I change my beneficiary?
Although we’ve been preaching a lot about the importance of choosing a life insurance beneficiary, we’re also aware that some people might already have this info set up. But, are the people/places you’ve listed up-to-date? For example, do you have an ex-partner listed? That would be a cruel twist of fate if that money went to someone you haven’t seen or spoken to in years. Not the last wishes you had in mind, we bet. Check your beneficiary info and make sure you update it to a loved one or organization that is relevant to your life right now. You can update your beneficiary info as often as you’d like, too. Although, we don’t imagine this being something you would need to do regularly. Just be aware that you should be updating your details if any huge life changes occur (e.g. marriage, divorce, or the birth of a child).
Also, keep an eye on your primary AND contingent beneficiary designations. A contingent being the person who handles life insurance benefits if your primary isn’t around. If your primary beneficiary passes away earlier than expected—or if some other extenuating circumstances crop up—you’ll want to make sure that your second-in-command info is up-to-date and is someone you’re cool with being upgraded to the primary position.
At the end of the day, choosing a beneficiary is just as important as taking out a life insurance policy. One doesn’t really matter without the other. Naming who you want to leave your money to may sound like a huge undertaking, but it’s really not that big of a deal. Usually, all you need to do is plug in a name or two into a form and the rest is taken care of. And you can probably do it all from behind a screen, in the comfort of your own home—no lawyers or third parties needed. So get to designating. And once you do, have a conversation with those people about the arrangements you’ve made. By sharing your wishes, you can confirm that both you and your beneficiaries are on the same page. Life has its ups and downs, which is all the more reason to plan ahead and stay prepared.