Unfortunately, there are thousands of families every year that struggle 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 should you get life insurance.
Choosing Your Beneficiary
A beneficiary does not necessarily have to be an individual. 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.
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.
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 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, 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 chance the beneficiary at any time. This will give you more freedom in case there are any problems with the beneficiary or you need to change who will receive the money
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 names. This can apply in most cases to spouses where the policyholder and 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 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.
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 of 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 that 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, which can lead to a lot of complicated problems in the future.
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.