Selecting a beneficiary for your life insurance policy sounds pretty straightforward. You’re just deciding who will receive the policy’s proceeds when you die, right?
But as with most things in life, it’s a bit more complicated than that. It can help to keep in mind that naming someone as your life insurance beneficiary really has nothing to do with you: It should be based on how the funds will affect the beneficiary’s life once you’re no longer here.
It’s very likely that if you’ve purchased life insurance, you did so to make someone’s life better or easier in some way in the wake of your death. But unless you consider all of the unique circumstances involved with your choice, you might actually end up creating additional problems for the people you love.
Given the potential complexities involved, here are a few important questions you should ask yourself when choosing your life insurance beneficiary:
1. What are you intending to accomplish?
The first thing to consider is the “real” reason you’re buying life insurance. On the surface, the reason may simply be because it’s the responsible thing for adults to do. But we recommend you dig deeper to discover what you ultimately intend to accomplish with your life insurance.
Are you married and looking to replace your income for your spouse and kids after death? Are you single without kids and just trying to cover the costs of your funeral? Are you leaving behind money for your grandkids’ college fund? Are you intending to make sure your business continues after you’re gone? Or perhaps your life insurance is in place to cover a future estate-tax burden?
The real reason you’re investing in life insurance is something only you can answer. The answer is critical, because it is what determines how much and what kind of life insurance you should have in the first place. And by first clearly understanding what you’re actually intending to accomplish with the policy, you’ll be in a much better position to make your ultimate decision—who to select as beneficiary.
2. What are your beneficiary options?
Your insurance company will ask you to name a primary beneficiary—your top choice to get the insurance money at the time of your death. If you fail to name a beneficiary, the insurance company will distribute the proceeds to your estate upon your death. If your estate is the beneficiary of your life insurance, that means a probate court judge will direct where your insurance money goes at the completion of the probate process.
And this process can tie your life insurance proceeds up in court for months or even years. To keep this from happening to your loved ones, be sure to name—at the very least—one primary beneficiary.
In case your primary beneficiary dies before you, you should also name at least one contingent (alternate) beneficiary. For maximum protection, you should probably name more than one contingent beneficiary in case both your primary and secondary choices have died before you. Yet, even these seemingly straightforward choices are often more complicated than they appear due to the options available.
For example, you can name multiple primary beneficiaries, like your children, and have the proceeds divided among them in whatever way you wish. What’s more, the beneficiary doesn’t necessarily have to be a person. You can name a charity, nonprofit, or business as the primary (or contingent) beneficiary.
It’s important to note that if you name a minor child as a primary or contingent beneficiary (and he or she ends up receiving the policy proceeds), a legal guardian must be appointed to manage the funds until the child comes of age. This can lead to numerous complications (which we’ll discuss in detail next week in Part Two), so you should definitely consult with an experienced Family Law attorney like us if you’re considering this option.
When selecting your beneficiaries, you should ultimately base your decision on which person(s) or organization(s) you think would most benefit from the money. In general, you can designate one or more of the following examples as beneficiaries:
3. Does your state have community-property laws?
If you’re married, you’ll likely choose your spouse as the primary beneficiary. But unless you live in a state with community-property laws, you can technically choose anyone: a close friend, your favorite charity, or simply the person you think needs the money most.
That said, if you do live in a community-property state, your spouse is entitled to the policy proceeds and will have to sign a form waiving his or her rights to the insurance money if you want to name someone else as beneficiary. Currently, community-property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Tomorrow, I'll continue with Part Two in this series discussing the remaining three questions to consider when naming beneficiaries for your life insurance policy.
Jessica A. Brown, attorney