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It is important to purchase some type of life insurance to protect the financial security of your family. You may decide to purchase an individual life insurance policy, or your employer may offer a group life insurance plan. Regardless of the type of insurance policy you decide to buy, you need to spend some time considering who you want to name as your beneficiary. Many policy holders fail to realize the importance of choosing a beneficiary for their life insurance policy.
What Is A Beneficiary A beneficiary is the individual who will receive the proceeds of your life insurance policy when you die. For example, if you choose your children as the beneficiaries of your policy, they will receive the death benefits of your insurance policy. Many policy holders designate their spouse as the beneficiary. However, you don’t need to specify an individual as a beneficiary. You can also designate any charitable organization, company or even a legal entity referred to as a trust. Common Problems Related to Choosing A Beneficiary Although choosing a suitable beneficiary is an important part of purchasing life insurance, many people neglect to select anyone. Other policy holders make a rushed decision without taking time to consider who would truly be the best person, organization or company to designate. Both of these situations can cause major problems when it comes time for your insurance company to pay out the benefits of your life insurance policy. Choosing Your Spouse as the Beneficiary If you fail to designate a beneficiary or do so carelessly, you risk causing unexpected tax bills, depriving your family members of intended benefits or causing frustrating legal issues. One common mistake is selecting your spouse as the beneficiary of your policy, even though he/she is unable or unprepared to manage the household finances after you die. You need to take this into consideration before automatically selecting your spouse on your life insurance policy. Another issue may arise when you select your spouse as the beneficiary and then subsequently get divorced. You may forget to change the beneficiary to your new spouse or to another individual. Consequently, all of your policy’s proceeds may end up going to your ex-spouse. Designating Your Children as the Beneficiary It may also be unwise to select your children as the beneficiaries of your life insurance policy. Depending on the laws in your particular state, a legal guardian appointed by the court will manage and retain the money until your children reach 18 or 21. Unfortunately, this process results in many expenses, delays and legal formalities. You need to ask yourself if you feel comfortable knowing that your children will receive all of the policy proceeds as soon as they reach the age of majority. Failing to Select A Beneficiary If you do not name a beneficiary, all of the proceeds of your life insurance policy will be added to your estate. The entire amount will also be charged estate taxes. One way you can avoid this problem is by selecting a trust as a beneficiary. Make sure to indicate the full name of your beneficiary, the person’s relationship to you and his/her social security number when you complete the beneficiary form. Some policy holders make the mistake of writing the word “spouse” instead of writing the person’s full name. In this case, the court may have to determine which spouse you meant if you later divorce and remarry. Choosing a suitable beneficiary is a very important decision. Before automatically choosing your spouse or your children, you need to consider all of the consequences. Make sure you select a beneficiary, regardless of whether it is a company, organization or individual. This will simplify the process of allocating the proceeds of your life insurance policy when you die. If you are having difficulty deciding who to select as your beneficiary, discuss the situation with a trusted financial or legal advisor or a reliable insurance agent. |
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