Life Insurance Beneficiary Rules & Mistakes To Avoid Making

Most people admit they don’t have enough life insurance. In fact, 52% of Americans do not have life insurance because they feel it’s too expensive. Many more are confused about who to leave their death benefit. Only 58% knew a spouse could be their beneficiary.

The same Forbes Advisory study showed that 12% believed a pet could be a benefactor. In my six years of life insurance experience, I’ve helped clear up confusion and give shoppers peace of mind when making final life decisions. Through this guide, I will help you understand how to ensure your final wishes are met so your family left behind is taken care of.

In some cases, you are legally bound to designate them up to a certain percentage.

• You can have multiple beneficiaries. You must list a primary beneficiary. You should also list a contingent beneficiary in case your primary passes away before you do. There is also no limit to how many beneficiaries you list.
• You must name a spouse in some states. In some states, called communal states, you must list your spouse as a beneficiary. They will be entitled to up to 50% depending on your state’s laws.
• You can refuse to name one. There is no rule that you must name a child or all your children in your policy. If you feel some are more responsible in carrying out your wishes, then you are free to name them over others.
• Minors can be beneficiaries. If a child is under 18, they can still be named a beneficiary, but the funds will not be available to them until they turn of age. The funds will most often end up in a trust until they turn of age.
• Some beneficiary designations are irrevocable. We will speak more about this in a moment, just know that some beneficiaries you cannot change without their approval once you name them.

Types Of Life Insurance Beneficiaries

There are different types of life insurance beneficiaries, then split within two different types of designations.

Primary Beneficiary

The primary beneficiary is the first person you select your death benefit will be distributed to. This can be anyone you choose. In most cases, and in some states, you are legally obligated to designate your spouse. They will receive the percentage of your death benefit you select. You can have more than one primary beneficiary.

Secondary / Contingent

A secondary or contingent beneficiary is your backup. They are listed in the event your primary beneficiary or beneficiaries are unavailable to receive the death benefit and unable to fulfill your last wishes.

Revocable vs. Irrevocable

A revocable beneficiary is one you can change at any time without notifying the named individual. While an irrevocable beneficiary, you must contact the named party and they must not only be informed, but sign paperwork to the change to the policy. And if you cancel the policy, they must also be notified in writing.

5 Mistakes To Avoid When Choosing A Beneficiary

Many times, people want to get the life insurance purchasing process over and done. However, this can lead to many mistakes, causing future headaches. Here are some pointers to overcome some of those errors, especially when it comes to naming your beneficiary:

1. Not selecting a beneficiary. While it’s true some states are communal and the policy benefits will automatically go to a spouse, not all of them are. If you have specific plans for how your death benefit is to be used, be sure you have a beneficiary named.
2. Selecting a minor as your beneficiary. While your heart may be in the right place, a minor cannot touch it until they are of age or without a trustee overseeing the account.
3. Selecting someone who is unwise with finances. If you have final wishes or legacy plans, ensure your beneficiary will carry them out. This is not the time to ‘give someone the benefit of the doubt’ when one has a history of responsibility mismanagement.
4. Not communicating with your beneficiaries. While you have private matters, a life insurance policy should not be one of them. If no one knows of its existence, how can your final wishes be carried out? Inform your beneficiaries, if not them, at least a trusted individual.
5. Not keeping your policy updated. If you have life changes like divorce, a beneficiary passes away, children are born, or you gain other assets, revisit your policy and update it.

Rules For Death Benefit Payouts

As with all things insurance, there are rules. When you pass away, certain rules must be adhered to for the death benefit to pay out.

Such as:

• Beneficiaries make the claim. – Only one who is named in the policy can claim it.
• You can choose how to split the funds. – The policy lays out who receives the money and how much. It cannot be easily contested.
• You can choose how the money is distributed. – Not only how it is split, but you can also stipulate if it is a lump sum or annual distributions.
• A will does not supersede a life insurance policy. – Understand that no matter what is written in your will, it will not override your life insurance policy. So, if you want your newborn nephew to receive college tuition money, add them to your life insurance policy.
• Some states are communal property states. – Remember, in eleven states you must name your spouse as your primary beneficiary with up to 50 percent in the policy.
• Policyholders can list beneficiaries but can also exclude. – A policyholder does not have to name every family member to their policy. No one is entitled to benefits.

How Payouts Are Split

The life insurance death benefit can be distributed how the policyholder sees fit. You can have as little as one beneficiary or as many as you see fit. Normally, there is a primary and a secondary beneficiary.

Payouts depend on which state you live in. Currently, nine states have community property laws. Meaning that you must name your spouse as your primary beneficiary. If one spouse passes away, the other is entitled to fifty percent of the other’s life insurance policy. There is a loophole if the spouse signs a waiver giving up that right. These nine states are:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

When choosing a beneficiary, there are different methods you can select: a specific percentage, per stirpes, or per capita.

A Specific Percentage

You can lay out a designated percentage to go to each child, relative, or designee. It must add up to 100 percent.

Per Stirpes

This helps if one of your designated beneficiaries passes away before you do. This would allow their remaining family to receive the benefits they would be entitled to.

Per Capita

This would give the death benefit an equal split amongst the remaining family members. Thus, if there were four and one of them passes away before you do, then the remaining three would then split the full death benefit equally.

It is also important to know that you are in control of how the money is distributed. It can be a lump sum or fixed monthly payment.

How To Choose A Life Insurance Beneficiary

According to a Life Insurance Barometer study, 44% want to have enough money when they retire, 38% want to have an emergency fund in the event of an emergency, and 29% want to be able to leave something behind so they do not burden loved ones with final expenses.

When considering beneficiaries, ask yourself:

• Who relies on you financially? How will they continue paying bills when you are gone?
• Who would best fulfill your final wishes, help you leave your legacy, and arrange for your funeral expenses to be paid?
• Who would you like to leave money to, children, charity, or a worthy cause?

It is completely up to the policy owner who receives the death benefit. It can be a spouse, partner, relative, best friend, or other entity such as a charity. Understand that in some cases when filing a claim, one must prove insurable interest. If you choose to leave money to a non-relative, provide documentation of your intention and reasoning.

When considering beneficiaries, avoid leaving death benefit directly to one with a disability. Doing so could place them in a new financial bracket and thus harm their ability to receive any health benefits they may be receiving at the time.

What Happens If There Is No Beneficiary?

If there is no life insurance beneficiary when you pass away, your insurance benefits will be added to your estate. This then goes to probate court. The administrator, or executor if there is a will, is in charge of taking an inventory of all your assets, paying your past bills, selling anything to settle balances, paying taxes, and filing your final tax return. Once complete, the remaining balance can be distributed to the beneficiaries.

A family member or the executor of a will is the one who will normally initiate the probate process.