Life insurance is one of the most valuable ways to prepare your loved ones for your passing. While it’s not pleasant to think about, it’s a lot more unpleasant when you don’t plan and leave your loved ones stranded.
When you set up your life insurance, you must choose beneficiaries. This is one of the most important and potentially difficult tasks when preparing for your death.
First, you should know the different types of beneficiaries you can choose:
- Primary beneficiaries – This is the first person in line to receive your life insurance benefits. For example, married couples typically make their spouse the beneficiary. Of course, you are free to choose anyone you want.
- Contingent beneficiaries – If the primary beneficiary is no longer alive and able to receive the payout, the contingent or second-in-line beneficiaries receive it. For example, if you name your spouse to get your life insurance payout but you die together, the second person listed on the beneficiary list would get the payout.
You can also make beneficiaries revocable or irrevocable. The names are pretty self-explanatory:
- Revocable beneficiary – You can change the beneficiaries on this policy at any time. There aren’t any restrictions to the changes.
- Irrevocable beneficiary – You cannot change the beneficiaries once you set them if you choose irrevocable beneficiaries. This may prove to be difficult in a divorce or tough family situation.
Choosing Multiple Beneficiaries
You don’t have to choose just one beneficiary for either the primary or contingent beneficiaries. If you want, you can split it up by percentage. This is common when parents want to leave a part of their benefits for the children rather than all of it to the spouse – this is common in divorce situations, but even in standard marriages as well. If it makes you feel better to know that everyone has ‘their part’ you can specify the percentages accordingly.
Choosing the Right Beneficiaries
So how do you choose the right beneficiaries? It’s a personal decision. Think about who you want to support upon your absence. Who would suffer financially if you died? You can name one or multiple people. You can make a list and put them in order, assigning contingent beneficiaries if you wish.
Just make sure you are specific about who your beneficiaries are and how much they should receive. Also have backups. You never know what life will throw at you or anyone else. If the beneficiary you named isn’t available, you need to have someone else for the money to go to.
Make sure you follow your state’s regulations if you choose a minor as the beneficiary – typically you’ll have to set up a trust or assign a guardian for the funds until they are of age.
Take your time when you choose beneficiaries for your life insurance. It’s a big decision that in some cases, may be a one time decision if you choose an irrevocable policy. Know your options, think about who you’ll choose and run it past someone you trust to make sure you’re making the right choices.