There are several ways to make certain that the family you leave behind is taken care of. However, financial security is a top priority in estate planning. One of the basic ways to provide this is through a life insurance policy. This can be used to cover major expenses, like funeral costs or outstanding debt, and it can also provide longer-term support, like supplementing income lost with the passing of a key breadwinner.
Forbes’ recent article, “How To Choose A Life Insurance Beneficiary” reminds us that there’s the task of determining who in your family needs this coverage, how much will they need, and for how long. Important factors include whether you have a spouse or partner who depends on you, younger children who need care, or parents that will need financial help. Selecting a beneficiary isn’t always a clear-cut decision, and there are several other components to the equation that should guide your decisions.
Age matters. It makes sense that a parent would want to designate a non-adult child as a beneficiary because of their lack of income. However, it is important to consider the process that comes with that decision. Naming a minor as a beneficiary will provide much-needed coverage, but they often won’t have access to the funds until they’re adults. If they need to access the assets in the policy prior to reaching adult age, the funds will have to be placed in the hands of a guardian.
Type of Policy. As time goes on, your family may need your financial income less, and that’s where understanding the difference in whole and term life policies plays an important part. If financial coverage is needed most when your children are of a certain age, buying a term life policy lets you to control that. A term policy will only be paid out to your beneficiary if you die during a fixed span of years (e.g., 10, 20, 30-year policy). In contrast, whole life insurance lasts your whole life. Your children will likely be grown, but the policy proceeds could be used for your grandchildren.
Designating multiple beneficiaries. You may have several individuals who are dependent on your income or who’d have trouble financially in your absence. If you’re having a hard time choosing between a spouse, parent, or child, it is possible to select multiple beneficiaries with equal or unequal distribution amounts. This lets you choose the right portion of your policy designated for each beneficiary you name.
Contingent Beneficiaries. If you leave your policy to just one person, it is important to have a backup or a contingent beneficiary. The primary beneficiary is an initial person to whom you leave your life insurance policy, and a contingent is the second in line to inherit the policy if the primary beneficiary dies.
Beneficiary designations can change. Beneficiary designations aren’t set in stone. You can change beneficiaries at any time, such as in the event of major life changes.
Selecting a beneficiary is an important part of the life insurance process. Beneficiaries should be those who’d be most affected by your passing.
Reference: Forbes (March 27, 2019) “How To Choose A Life Insurance Beneficiary”