It’s important to get the nomination right so that your loved ones won’t have any problems receiving the payout. With proper planning, you can avoid this situation from arising. In this article, we will explain everything you need to know about beneficiaries.
In this article, we will explain everything you need to know about beneficiaries.
Your Family Situation
Family with children
If you have a spouse and children under the age of 18, your spouse will probably be handling the family’s finances after you’re gone, including day-to-day living expenses and the mortgage.
In most cases, your spouse will also be the guardian and provider for your children, so it makes sense for most people to list their spouse as their primary beneficiary on their life insurance.
When there are no children involved, many people list their spouse as the primary beneficiary and their parents as contingent beneficiaries.
This means that your spouse will receive your life insurance payout, but if your spouse is are also deceased, then your parents will receive the money.
If your children are minors, the insurance company won’t pay them the benefit directly. Instead, the money will go to the children’s custodian or into a trust fund.
It’s important to clearly specify who the custodian is in your will and to the insurance company so that the funds are easily available to cover your children’s needs.
If the custodian isn’t clearly defined, the legal process of sorting out who should receive the benefit can take months.
What is a contingent beneficiary?
Think of a contingent beneficiary as the backup option. If your primary beneficiary passes away before or at the same time as you, the benefit will be paid to the contingent beneficiary instead.
For example, if your spouse is the primary beneficiary, but you both die at the same time in a car crash, then the contingent beneficiary might be your parents or your children.
Options of choosing beneficiaries
When you select more than one beneficiary, you’ll need to specify how the money should be distributed amongst them.
A per capita nomination specifies how the money is to be split between the beneficiaries. You can give them all an equal share of the money or give some beneficiaries more than others.
For a per stirpes nomination, you need to specify the primary beneficiaries and the contingent beneficiaries. As an example, you could list your children as the primary beneficiaries and your grandchildren as the contingents.
This means the money will go to your children, unless one of them is deceased, in which case their offspring will receive that person’s share. This type of nomination is sometimes called a “branches” nomination because the money flows through the “branches” of the family tree.
Your beneficiaries can be changed
As your life changes, you might find that you want to change your beneficiaries. For example, you might want to add a newborn child or remove an ex-spouse.
Some beneficiary nominations are revocable and can be changed at any time, while others are irrevocable and can’t be altered during the life of the policy.
Irrevocable beneficiaries often come into play in cases of divorce where children are involved. Divorce agreements can sometimes specify that each parent has to have life insurance so that the children are financially taken care of if one parent dies.
In this situation, an irrevocable beneficiary ensures that neither party can change their beneficiary later.
The bottom line
The best beneficiary nomination really depends on your personal circumstances, but it’s critical to get it right. Consider your family situation when making a beneficiary decision.
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It’s recommended to include both a primary and a contingent beneficiary. In the case where something happens to your primary beneficiary, your secondary beneficiaries can still receive a payout. The good news is beneficiaries can be changed in the future, so don’t feel concerned if you need to make any chances.
Talk to your life insurer or lawyer can help you set up the nomination so that your loved ones are taken care of. With proper planning, your life insurance policy can be used by your family and loved ones when the time comes.
Image Credit: who can I name as beneficiary by twenty20.com
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