Although it can be disheartening to dwell on what happens after we die, it’s important for all of us to get our personal affairs in order while we’re alive. That way, those who love and depend on us are taken care of after we’ve gone. Arguably the most important part of the estate planning process is designating beneficiaries for your life insurance policies to ensure that your loved ones are taken care of.
What Is a Life Insurance Beneficiary?
An insurance beneficiary is someone who will receive a cash payout and other benefits upon your death. You can have more than one beneficiary. And sometimes, it might make sense to select a primary beneficiary and a contingent beneficiary. The primary beneficiary is the first person the life insurance company looks to when sending a payout following your death. A contingent beneficiary is the person who receives the payout in the event that the primary beneficiary predeceases you.
You can also have one beneficiary receive a certain percentage of the payout and a secondary beneficiary receive the rest. In this scenario, your secondary beneficiary would receive her share regardless of the status of the primary beneficiary.
It might be a good idea to have both a primary and contingent beneficiary designation. If there’s no listed beneficiary, the payout might go to your estate. If that happens, those who may be relying on the money to survive or contribute to funeral costs or paying off debts may not receive the money for some time.
List Your Beneficiaries by Name
It’s important to be specific with your life insurance beneficiary designation. Specificity and clarity in naming who is to receive your cash payout helps to prevent confusion. For example, if you simply state “my wife”or “my husband” is to receive your benefits, an ex-spouse may emerge and claim ownership of them. Furthermore, if you simply put “my children” as beneficiaries, step-children who you may not have intended to receive your payout could claim it.
It’s wise to include the beneficiary’s full name and social security number. Doing so can help the insurance company or any other benefits agency find this person. You might not want to name any minors as your beneficiaries. Instead, it might be better to leave certain benefits to your children in your will to be paid out when they reach a certain age.
Naming and Updating Beneficiaries
When you’re deciding who to name as a beneficiary for your life insurance, ask yourself who would be in a tight spot if your income were to unexpectedly vanish. This could be your spouse, children, other family members or anyone who financial relies on you.
Many people choose to name a trust as the primary beneficiary for their life insurance or other accounts. This allows you to have a bit more control over the assets after you die, since the transfer will have to adhere to the terms of the trust. For instance, if you wanted a beneficiary to receive some assets, but only after she turned 18, a trust would allow you to do that.
When you name beneficiaries for your life insurance policy, you can’t just set it and forget about it forever. Maybe you got divorced and remarried; maybe you named your children but you’ve had additional children since. Regardless of the circumstance that changes, failing to reflect the change can mean serious headaches for your survivors after the fact.
Per Stirpes vs. Per Capita
There are some cases where one of the beneficiaries you designate may predecease you. If this occurs, the default course of action is usually to transfer that share to the other beneficiaries. You can, however, customize this process by setting up a per stirpes or per capita designation. With a per stirpes designation, the inheritance of a predeceased beneficiary would be split among that beneficiary’s heirs rather than a different beneficiary.
A per capita designation has a similar effect, but it ignores any weight you originally gave to one beneficiary over another. For example, if you name Tom as a 65% beneficiary and Janice as a 35% beneficiary and they both die before you, each of their heirs would receive an equal amount under a per capita designation, whereas Tom’s heir would receive more under a per stirpes designation.
Other Entities with Beneficiaries
While people are generally referring to life insurance policies when they discuss beneficiaries, there are other accounts and documents for which you should name beneficiaries.
For one, you’ll need to name beneficiaries if you write a last will for yourself. Once you pass away, the executor of your estate will be in charge of transferring your assets to the beneficiaries you name according to the terms of your will. Creating any type of trust, whether it’s a living trust, testamentary trust, charitable trust or any other kind, will require naming beneficiaries as well.
You can also name beneficiaries for qualifying retirement plans like 401(k)s and IRAs. The funds will transfer to the beneficiaries you name if you pass away with money left in these accounts. If your spouse is the beneficiary of your IRA, he can roll the funds directly into his IRA. If your beneficiary isn’t your spouse, there are a few ways to transfer the funds. The exact method will depend on your plan administrator.
Tips for Planning Your Estate
- If you’re planning your estate or just searching for financial advice in general, a financial advisor can be a big help. SmartAsset has a financial advisor matching tool to find you an expert who fits your needs. Just answer a few questions about your financial situation and the tool will match you with up to three advisors in your area. Then you can review your options and meet with your matches to see which advisor is best for your needs.
- If you’re planning your estate and the idea of probate seems like a hassle, you may want to open up a living trust. Once you pass away, your successor trustee will be able to transfer the contents of your trust directly to your beneficiaries. The trustee won’t have to seek approval from the court.
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