How important is beneficiary designation in life insurance?


It is very important. Just look back at your reason for buying life insurance. It is likely you purchased it because you want your loved ones, the people you will leave behind, to have the resources to pay the mortgage, to replace your lost income, to fund the children's college education and to cover other expenses.

If you don't designate your beneficiaries they will not receive the proceeds of the death benefits.

What is a class beneficiary designation in a life insurance policy?

There are two classes under which a beneficiary may be designated:

  • primary and
  • secondary or contingent.

The first class of beneficiaries are those individuals or entities who are entitled to the proceeds upon the death of the insured. The second class gets to be entitled to the proceeds in case the primary beneficiary dies ahead of the insured.

Along with class designation, you would need to specify how the proceeds will be distributed. Your choices are:

  • Per Capita, under which if a beneficiary dies ahead of the insured the other beneficiaries will get an equal share of the proceeds, or,
  • Per Stirpes, under which the benefits are passed on to the beneficiary's descendants.

Revocable vs. Irrevocable Beneficiaries

Your wise choice would be revocable beneficiaries. This allows you to freely to exercise all the rights afforded to you under the contract without the need for you to get the consent of the beneficiary.

Be aware of some limitations when having revocable beneficiaries:

  • In certain states it is illegal for employers to be named as beneficiaries in group term life insurance policies.
  • In certain states, it is required of beneficiaries to possess insurable interest in the life of the insured.
  • Many states have laws that restrict the designation of class beneficiaries where a minor is the insured individual.
  • Divorce has no effect on the right of the policyholder to make changes to the beneficiary. Exceptions do apply in certain states where the policy owner is allowed to change the beneficiary even if the irrevocable option was chosen prior to divorce.
  • A beneficiary who causes the death of the insured individual via self-defense or because of an accident is usually disqualified. In this case, a secondary beneficiary becomes entitled to the proceeds.
  • In the event of simultaneous deaths of both the primary beneficiary and the insured and there is no way to establish who died first, the Uniform Simultaneous Death Act shall be followed. The Act dictates that the benefits will be paid out as if the primary beneficiary perished first. Therefore, the secondary beneficiary will be entitled to the proceeds.

How to change the beneficiary of a life insurance policy:

How often can I change the beneficiary on my life insurance?

As often as you want. To enjoy this privilege be sure you choose the “revocable beneficiary” option in your policy.

Can you change an irrevocable beneficiary?

Yes, you can. But, you would need the irrevocable beneficiary's consent.

Get in touch with your broker or the life insurance company itself. They should provide you with standard documents for you to accomplish. Be prepared with information about the new beneficiary like his or her name, address, social security number and how they are related to you.

If you are planning to have the proceeds divided among 2 or more beneficiaries, be prepared to tell how much you want that each beneficiary will get.

When you accomplish the form, you must have witnesses who are not your beneficiaries.

How should a life insurance beneficiary be named if a minor?

The minor should have a guardian appointed or you use a trust.

Does the beneficiary have to pay bills left by the insured?

As far as the insurance company is concerned, the beneficiary can spend the proceeds in any way he or she wants. The beneficiary, therefore, has no obligations to use the money to settle bills or debts.

If the proceeds are paid to the insured's estate, then it becomes a different matter altogether. Here, the proceeds become part of the estate. As such, settlement of all debts comes first followed by the distribution of the remaining amount among the heirs.

Can you file a claim if you are not the beneficiary?

If you are a non-beneficiary you may be able to contest a beneficiary. Some situations where you can contest include:

  • that the deceased was forced or pressured to name the beneficiary,
  • that the deceased was not of sound mind when he named the beneficiary, or
  • that the deceased failed to update the policy after remarrying or after adopting a child.

Can a beneficiary refuse a life insurance proceed?

Yes, a beneficiary is free to decline receipt of the proceeds. In such instance, the secondary beneficiaries will be awarded the amount. If there are no secondary beneficiaries, the money is awarded to the deceased individual's estate.

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