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When you buy a group or individual life insurance policy, you will be asked to name one or more beneficiaries. These are individuals, entities or trusts that will receive a payout if you pass away for causes that are covered by your life insurance plan. Start comparing life insurance rates now by entering your zip code in our FREE tool above! The entire purpose of applying for insurance and paying premiums consistently is to provide those that you love and that depend on you with financial protection.
It is critical that you take the time to list those who are in need of the protection for the long-term as you are filling out your application for underwriting.
While you must put thought into the beneficiaries that you name and how you name them, it is possible to make changes to your policy when life events change your dependents and who needs the protection. Before you name or select your beneficiary for the first time, it is important to learn about life insurance and beneficiaries in detail. Read on, and get the answers to all of the most common beneficiary related questions and concerns.
What is a beneficiary?
A beneficiary is a person or entity that you name and designate to receive a portion or the entire death benefit paid out from your life insurance policy. When you are applying for coverage, you can name a single person, multiple people, a trustee, a charity or your estate. After issuance, the company will pay the benefit to anyone designated on the policy as a primary recipient or as a contingent recipient if the primary dies before you. If, for some reason, you do not want your beneficiaries to receive benefits any longer, your policy must be changed.
Different Levels of Designation
There are two different levels of designation that you can choose from when you are naming an entity or person: primary or contingent. All policies should contain both levels of the beneficiary to prevent problems when a claim is filed. A primary is essentially the number one person who is to receive your benefits upon death. A contingent is only relevant if you outlive the primary. There should always be a contingent for each primary that is listed. If you are named your beneficiary to receive a share, you should indicate the share that the back-up is to receive now that your designations have been changed.
What is a per stirpes designation?
While it is common for benefits to be divided equally among the surviving primary and contingent beneficiaries, there are times where this will not happen. If you select a per stirpes designation, there is no need for several contingents because the deceased primary’s heirs will receive the benefit that they would have received if they were still living. This is essentially the designation that you would choose if you want to make passing down the award as easy as possible. While it may sound involved, to use this designation, all you must do is write the primary beneficiary’s name and then include the words “per stirpes” after it.
What is a non-natural beneficiary?
While it is most common for individuals to list their family members and heirs as beneficiaries, there are cases where you may need to list a company, a charity or a trust. A non-natural beneficiary is when the beneficiary that is listed is not a person or multiple people but instead an entity. You can list non-natural beneficiaries as either a primary or a contingent. When the entity is a primary, there is not a need for a contingent because an entity cannot pass away.
What do you need to do if you do name a trust?
There are several different reasons why people set up trusts. A big reason is because it is easier to pass assets on to family members tax-free. Naming a trust is not as simple as just listing the trust. In addition to designating the trust, you will need to provide the proper documentation. One document must identify the trust, another must show the appointed trustee, and the last will be the signature page.
While there are reasons to name a trust, most experts recommend to name beneficiaries individually when you can, because it eliminates the complications.
If you are worried about your beneficiaries having issues with mental health, drugs, creditors, or they are minors, setting up the trust could be a better alternative.
What happens when there is no beneficiary?
Now that you know about all of the various types of beneficiaries that you can designate, it is time to learn what would happen if you designated no one or if all of the people designated are no longer living. Every insurance company has their own set of bylaws that you can request that will explain in detail how this scenario is handled.
While there can be different ways of handling the situation, typically there is an order of classes assigned to different family members. Payment will be made in the order of the classes. Some companies will automatically pay the benefits to the estate. Most often, the classes are as follows from highest priority to lowest:
- Natural or legally adopted children
- Mother and father or the survivor thereof
- Insured’s estate
What happens if the company cannot find a living beneficiary?
If you have named a beneficiary, it is important to keep the contact information for that beneficiary up-to-date so that the death benefit can be claimed quickly. Millions of dollars in benefits go unclaimed every year for a number of reasons, and one reason is simply because the company is not able to find the claimants. The unclaimed benefits will sit and the company will wait for those who are entitled to the money to discover the money is waiting. To prevent this from happening, you should always list the full name of the designee and their current address.
How can you change your beneficiary when your policy is active?
If you own your life insurance policy, you have the right to change your beneficiary at any time. Many people mistake being the named insured for being the owner. The owner can actually be another party who is listed and had control over the policy and who is financially responsible for paying premiums.
As the owner of the policy, you may be expected to meet conditions before a change will take effect.
The requirement is typically to fill out a form and to sign that form. You will be asked to list the new beneficiary’s full name, their address, and may be asked for their social security number if you can provide it. Once this is submitted and approved the change will take effect.
Is there ever a time where you cannot change the designee?
If you are not the policy owner, you do not have the authority to make changes to the policy. If you are, there is still a time where you may not be able to change your designee. If you have an agreement with someone and the policy is fulfilling the agreement, you may have an irrevocable beneficiary. Once you have an irrevocable beneficiary, you cannot change the person without getting consent from them. This is why it is very important to review your policy closely before it is issued.
Reviewing Your Life Insurance Policy Frequently
It is crucial that you take the time to review your life insurance policy regularly. When you buy a policy, you are so happy that the process is over that you might not want to look at your policy again until you buy a home or have a new baby. Unfortunately, when you do not look at something for decades, you might overlook changes that really need to be made. Sit down and review the death benefit, the riders, and the beneficiary information at least once every one to two years.
Where can a policyholder review their beneficiary information?
There are two ways to locate the designations on your policy. If you have your paper policy, you can find the names on this policy. You should keep this filed away and accessible to your executor. You may also be able to find this information by accessing your policy online or calling your agent when you cannot find your documentation.
There is more to buying a life insurance policy than selecting a type of insurance, a death benefit and a term period. While these are often the tasks that are focused on, you also need to select the right beneficiaries and think about the unexpected. If you are interested in pricing the cost of coverage before you change beneficiaries, use an online rating comparison tool and do it from home. You can find out what a new insurer would charge you, and also decide if replacing your coverage or adding to your portfolio is a smart choice for your dependents. Compare life insurance rates now by using our FREE tool below!