Choosing a beneficiary for your insurance policy could be a decision which may not be as easy as you think. A beneficiary receives your assets when you die, but deciding who that person should be, is not always just a matter of choosing someone. Your policy rules and state laws may affect or perhaps restrict your choices. So, when deciding who your insurance beneficiary should be, it is important to ensure sure you are aware of your policy and any regulations it is subject to. Here are some suggestions for determining a way to select the right beneficiary.

Understand your life insurance policy.

When you purchase insurance, you are doing it for a reason. Typically, a policy provides financial security for loved ones after an individual dies, especially if the family relies on his or her income. But there are other reasons, like a corporation or business that you simply want to ensure continues in your absence. You will want to make sure your funeral service is covered, or your debts may be paid off, so your family is not burdened with these expenses. Maybe you wish to leave behind money for your child’s education or ensure the estate and inheritance taxes are covered on any assets your heirs receive. Whatever the reasons for purchasing insurance, you will have to factor them in when choosing your beneficiary.

Consider your beneficiary options.

When you are choosing your beneficiary, remember you have got more options than simply someone in your immediate family. You will be able to choose one or multiple recipients. Some examples of beneficiaries include:

  • A single person
  • Two or more people
  • The trustee of a trust you have established
  • Your estate
  • A non-profit or charity

Once you have decided who that person will be, make sure provide  as much information as possible about this person – full name, Social Security number, date of birth, address, phone number, the nature of the person’s relationship to you – so your insurance company can easily locate him or her.

When you have selected who will receive your assets, the subsequent step is to work out how they are going to be distributed. If you have got multiple beneficiaries, it is a good idea to ask a legal counsel or a financial advisor for assistance with this process.

Select a contingent beneficiary.

Regardless of whom you choose as your beneficiary, be sure that you choose both a primary and a contingent beneficiary. A primary beneficiary is the person that you designate to receive all of the proceeds from your death benefit. If the primary beneficiary predeceases you, then the death benefit will be paid to the contingent beneficiary; a contingent beneficiary is your back up beneficiary.

Your benefit plan or life insurance policy may allow you to choose more than one contingent beneficiary, or split the proceeds between two or more contingent beneficiaries. 

Review your beneficiary choices yearly.

Your life changes so do the lives of your loved ones. Major events like marriage, having a baby, getting a divorce, and death are just some things that may affect who you would possibly want as your beneficiaries. It is essential to review your beneficiary designations on your insurance policy at least once a year.  If the designations are not current, you risk leaving your assets to someone who may have predeceased you or even in some cases an ex-spouse.

Avoid designating a minor as your beneficiary.

Naming your children as insurance beneficiaries seems like a natural choice, but it is not necessarily the smart one. If you die while your children are still minors, they’re not be eligible to receive the funds until they reach the age of 18.  This delay is detrimental if the proceeds are needed for their living or educational expenses. There are a few ways to make sure your children can have immediate access to your assets:

Appoint a guardian.

Legal guardians are allowed by many states to receive a benefit on behalf of minors. you will be able to appoint a fiduciary while you are alive and therefore the state must grant him or her the legal rights to manage the child’s finances.

Establish a trust.

Trusts are a good solution for leaving money to your children. You will be able to set up a life insurance trust and name a trustee to oversee the funds and distribute the money to your children.

Do not rely on your will alone.

Wills work alongside your insurance policy. You cannot use your will to change your insurance policy, so if you named someone as a beneficiary of your life insurance, that person will receive your death benefit. To make sure your wishes are honoured, ensure your will matches your insurance policy. Your insurance beneficiary designations will supersede the will in almost every case because it is a contract.

Get acquainted with your state laws.

Your state may have laws about beneficiaries that you simply are not aware of. for instance, in some states, like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin have community property laws, and three other states — Alaska, South Dakota, and Tennessee — have elective community property laws. These laws give couples equal ownership of their joint property. If you wish to designate someone besides your spouse as a beneficiary, your wife or husband will have to sign a waiver. Make sure you research the laws in your state or discuss with a financial advisor the rules your beneficiary choices could be subject to.

Do not leave your death benefit to the courts.

If you do not name a beneficiary, your insurance benefit may go to your spouse. Policies vary, however, and there might be a particular order of distribution in your plan should you leave the beneficiary box blank. There is a good chance your insurer could issue the benefit to your estate and a court will decide the way to handle the funds. It could take time for the money to be distributed to those you love. The process can also be expensive, and the cost would be deducted from your estate.