You want to make sure that after you pass away your hard-earned income and benefits go where you've planned.
The same is true for your life insurance. When you purchase life insurance, you'll be asked to name a beneficiary on your policy. It's important to understand what that means so you can know your options.
Here, you'll learn the basics about a life insurance beneficiary and the beneficiary options you have as you make these key decisions.
What is a life insurance beneficiary?
As part of your life insurance policy, you can select a beneficiary — to whom the benefit will go after you pass. A beneficiary can include one or multiple people, as well as a charity, trust or organization, among other options.
If you continue to pay your life insurance premium on time over the life of the policy, your death benefit will go to the party that you've selected. It's important to understand that any beneficiary you designate must be named, since they must be found and notified in order to ensure your benefits are going where you want them to after you pass. The more information you can provide the better. For instance, it may not be enough to say "my children;" you'll want to include their full names and Social Security numbers, as well.
It's always a good plan to designate a time to review your beneficiary selections on a yearly basis — after all, situations can change. You'll also want to review your beneficiaries after any big life event, such as a marriage or divorce, or when new children are born or reach adulthood.
Why do you need a life insurance beneficiary?
The primary reason why you should name a beneficiary is to ensure that your assets go where you want them to go after you pass.
Remember, you've chosen to have a life insurance policy because it will help your loved ones replace your income when you pass. By naming one or more beneficiaries, you help ensure an efficient transfer of assets to those loved ones.
Not naming a beneficiary is a common mistake that can have a big impact on your life insurance policy and estate planning down the road.
Who qualifies as a beneficiary?
In many cases, it's common to name an immediate family member such as a spouse, child, grandchild or sibling as the beneficiary of a life insurance policy.
However, it's possible for you to choose other options. Some common beneficiary options include:
A legal entity, which can include a trust
A non-profit or charity of your choosing
A person(s) outside your related family, including a close friend
Keep in mind, you don't have to name just one person as your beneficiary. You can select multiple primary beneficiaries, as well, and exactly how you want the death benefit to be divided among them.
Finally, as you make your decision, check your local laws. Some states have specific requirements regarding beneficiaries who are minor children or who live out of state, for example.
What is a contingent beneficiary?
In the event your primary designated beneficiary is no longer available — for example, if they passed away — you may choose to name a contingent beneficiary on your policy. These are also called secondary beneficiaries, and they would be next in line for the policy's death benefit.
In many policies, it's also possible to name a tertiary beneficiary. Naming these additional levels of beneficiaries ensures you remain in control of deciding where your benefits go over the long run.