- How do I choose a beneficiary for a life insurance policy?
- July 31, 2013
A beneficiary is a person, who will receive the funds in your life insurance policy when you die, which will vary depending on your personal situation and on the laws in your state. You can name a primary and a contingent beneficiary, as well as naming multiple primary and contingent beneficiaries.
Please note that the following information may or may not work for everyone. It should only be used as a guideline for choosing a beneficiary. For more in-depth information, please seek out a planning attorney.
The proceeds from a life insurance policy usually go directly to the beneficiary, thus avoiding probate. Life insurance proceeds are usually not subject to income tax.
However, if there is still an estate tax and your estate is subject to this tax, then the life insurance proceeds may be used to pay this off. It is advised to work with an estate planning attorney and have a will drawn up – and/or a trust, if the attorney feels that it’s a benefit to you.
When you do meet with the planning attorney, you should discuss your life insurance. If you already have drawn up a will or trust, you should call your attorney prior to applying for insurance.
If you do not have either document, you can change the owner and beneficiary of your life insurance policy at any time.
If you have multiple beneficiaries, you can add one of the following definitions to further direct the distribution of the death benefit:
If the beneficiary dies before the insured, the remaining beneficiaries will equally divide that share of the proceeds in addition to receiving their own shares when the insured dies either (1) by head or by individual or (2) to share equally.
If a beneficiary dies before the insured, the beneficiary’s share of the proceeds will be given to their heirs rather than going to the remaining beneficiaries when the insured dies.
It is very important to make sure that all documents are clear and concise, because you will not be around to clarify them. Also, make sure that there are no spelling errors and full names are used.
If you have a child under the age of 18 and you name them as a beneficiary, whoever has physical guardianship will typically have financial guardianship. That may not be how you wish for it to be. Again, that’s why it is a good idea to have estate planning done with an estate-planning attorney. Beware of living-trust seminars and non-attorneys peddling living trusts.
Another issues to consider is a simultaneous death, where the insured and primary beneficiary die together (e.g., car crash) and it cannot be determined who died first. Some states have enacted the Uniform Simultaneous Death Act, which provides that, in such a case, the proceeds are paid as if the primary beneficiary died first.
Therefore, the contingent beneficiary would receive the proceeds. If there were no contingent beneficiary, the insured’s estate would receive the proceeds.
Hence, it’s important to consider this in your estate planning and seek out assistance when you come across any questions or concerns.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.