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6 Questions to Consider When Selecting Beneficiaries for a Life Insurance Policy
When it comes to selecting a beneficiary for your life insurance policy, it seems like an easy decision. You’re just deciding who will receive the policy’s proceeds when you die, right?
Unfortunately, it is a little more complicated than that. It helps to keep in mind that when you name someone as your life insurance beneficiary it really has nothing to do with you. When selecting who you would like to your life insurance policy to go to, you should base it on how the money will affect the beneficiary’s life once you are no longer here.
If you have already purchased life insurance, you probably did it to help those around you when you are no longer living. Unless you take into consideration all of the unique situations that will come with your choice, you might end up creating more problems for those you love.
Here are a few important questions you should ask yourself when choosing your life insurance beneficiary:
1. What are you intending to accomplish?
One of the most important things to consider is why are you buying life insurance in the first place. Many people say they bought life insurance because it was the responsible thing to do, and that may be true, but knowing what you ultimately intend to accomplish with your life insurance is really what you should ask yourself.
Are you married and want to make sure your spouse and kids are taken care of after your death? Are you single without children and just looking to cover your funeral expenses? Do you have grandchildren and just want to leave money for their college fund? Do you own a business and want to make sure it can continue after you’re gone?
The real reason you are investing in life insurance is something only you can answer. Your answer is important because it is what determines how much and what kind of life insurance you should have in the first place. By clearly understanding what you are intending to accomplish with the life insurance policy, you will be in a better position to make the decision of who to select as the beneficiary.
2. What are your beneficiary options?
When you obtain a life insurance policy, the 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 do not name a beneficiary, the insurance company will disburse the money to your estate. If your estate is the beneficiary of your life insurance, a probate court judge will direct where your insurance money goes as part of the probate process.
If your life insurance money ends up as part of your estate, your loved ones may have to wait several months or even years to get access to the money. To avoid the delay and save your loved ones from all of the stress that comes with the probate process, you should, at the very least, name one primary beneficiary.
However, naming alternate beneficiaries is also very important. If your primary beneficiary passes before you, you want to make sure you have at least one contingent beneficiary named. To be extra careful, you should name multiple contingent beneficiaries because you never know what could happen. 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. Also, a beneficiary does not even have to be a living person. You can name a charity, nonprofit, or business as a primary (or contingent) beneficiary.
It’s important to note that if you name a minor child as a primary or contingent beneficiary (and they end up receiving the proceeds), a guardianship will have to be opened 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 attorney like us if you’re considering this option.
When you select a beneficiary, make sure you base your decision on which person(s) or organization(s) would benefit most from the money. In general, you can designate one or more of the following examples as beneficiaries:
- One person
- Two or more people (you decide how money is split among them)
- A trust you’ve created
- Your estate
- A charity, nonprofit, or business
3. Does your state have community-property laws?
If you’re married, you’ll likely choose your spouse as the primary beneficiary. However, it is important to note that different states have different rules. For example, if you happen to 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.
Florida is not a community property state. As such, barring other circumstances (divorce decrees, etc.) you should be able to choose anyone or any business you want as a beneficiary. Again, it is always a good idea to consult with an experienced attorney like us before you make these decisions.
We’ll continue with Part Two in this series discussing the remaining three questions to consider when naming beneficiaries for your life insurance policy.
We can guide you to make informed, educated, and empowered choices to plan for yourself and the ones you love most. Contact us today to get started with a Family Planning Session.
This article is a service of The Solution Law Firm, P.A. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Planning Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Planning Session and mention this article to find out how to get this $750 session at no charge.