Beneficiaries are an important part of your life insurance contract. Since the purpose of buying life insurance in the first place is to provide money to those in your life who would suffer a financial loss or hardship upon your death, it is important to choose and properly designate the correct people to whom the money should be given once the policy has to be paid.
A beneficiary is the designated person, people or establishment that receives the proceeds of a life insurance contract upon the death of the insured person. The beneficiary must be designated at the time of the policy application, and the application will be considered incomplete and unable to be underwritten and issued if this information is missing. The beneficiary designation becomes part of the contract itself when the policy is issued. The beneficiary can be changed at any time during the life of the insured person upon a written request to the issuing insurance company. Generally speaking, the beneficiary must have an insurable interest in the insured person. In other words, the person or people receiving the proceeds must have a financial incentive for the insured person to remain alive.
Insurance policies will generally ask for both a "primary" beneficiary as well as a "secondary" (or "contingent"). This is to increase the chances that there will be a living person to whom the proceeds can be paid upon the insured person's death. It is possible that the insured person may outlive the primary beneficiary, or that both the insured person and the beneficiary would be killed at the same time. In these cases, having a secondary beneficiary will allow the proceeds to still be paid. It is very wise to designate both a primary and a secondary beneficiary, and to update them often, just as you would with a will.
Upon the death of a person, all assets owned by that person become part of his or her estate, which must go through a legal process called probate before passing on to the survivors. Probate can be lengthy and expensive. It is unwise to ever designate your estate to be the beneficiary of life insurance proceeds, as this will include all proceeds in the probate process, which then subjects them to legal fees and possibly even taxes. In the absence of living beneficiaries, some states will include the insurance proceeds as part of the estate. This is an easy problem to avoid simply by choosing appropriate beneficiaries.
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Common beneficiaries include the spouse or children of the insured person, or another family member. People with whom there is an established relationship, such as an unmarried partner or close family friend, are also acceptable. In business situations, a parent company may be named the beneficiary of a policy written on a key employee. It is also common to leave all proceeds to an institution, such as a university, church or library that was important to the insured person. The primary criteria for whoever is listed as a beneficiary is having an insurable interest. It is the prerogative of the issuing insurance company to evaluate the insurable interest of the listed beneficiary and to reject that choice if necessary. This is done primarily to avoid conflicts of interest; the insured person should be more valuable to the beneficiary alive than dead.
Mistakes To Avoid
When designating a beneficiary, be as specific as possible. It is wise to list the full legal name of the person or people listed, as well as dates of birth and even social security numbers if possible. Many people have the same name, and many people have the same birthday, so by listing as much information as possible about the beneficiary you can avoid potential misunderstandings.
If listing more than one person in either the primary or secondary fields, be specific as to what percentage of the proceeds each person is to receive. It is acceptable to leave differing percentages to different people. It is also acceptable to list equal shares for each beneficiary.
Be as specific as possible about relationships to the insured person. This is especially important with children in a non-traditional family situation. For example, if the insured man has two children of his own and another child from his wife's first marriage to someone else, listing "Children of [insured man]" as the beneficiary will exclude his wife's child from the proceeds, as that child is not a natural child of the insured. Remember, too much information is better than not enough. You won't be around to clarify any misunderstandings when your policy is being paid.